Roth IRA: Income Limit Question

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xrw1
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Roth IRA: Income Limit Question

Post by xrw1 » Thu May 11, 2017 8:26 am

Hi everyone,

Currently, I have maxed out my 2017 Roth IRA ($ 5500) and on track to max out my 401k ($ 18000) and my income is not near the Roth IRA Phase out of $ 118k.

I have vested stock options from my company over the years that I could sell, but that will put me in the Roth IRA income phase out and it may even possible to put me over the income of 133K which makes me ineligible for roth ira.

Questions:

1) Should I sell some this year and some next year to make sure that i have some contributions to roth ira?

2) If I do sell, how and when should I withdrawl the over contribution to Roth Ira? Do I wait to after I file taxes then withdrawl the overage? What happens to the appreciated portion of what I over contributed?

3) If I do sell and that I know I will be over the income limit, would it be better that I withdrawl the over contributions earlier in the year than wait until after I file taxes?


Thank you in advance and I greatly appreciate everyones help!

xrw1
Last edited by xrw1 on Thu May 11, 2017 9:32 am, edited 1 time in total.

The Wizard
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Re: Roth IRA: Income Limit Question

Post by The Wizard » Thu May 11, 2017 8:31 am

xrw1 wrote:Hi everyone,

Currently, I have maxed out my 2017 Roth IRA ($ 5500) and on track to max out my 401k ($ 18000) and my income is not near the Roth IRA Phase out of $ 118k.

I have vested stock options from my company over the years that I could sell, but that will put me in the Roth IRA income phase out and it may even possible to put me over the income of 133K which makes me ineligible for 401k...
$133k does not make you ineligible to contribute to your 401k.
There is some sort of Highly Compensated Employee limit, buy I'm not an expert on that...
Attempted new signature...

xrw1
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Re: Roth IRA: Income Limit Question

Post by xrw1 » Thu May 11, 2017 9:33 am

The Wizard wrote:
xrw1 wrote:Hi everyone,

Currently, I have maxed out my 2017 Roth IRA ($ 5500) and on track to max out my 401k ($ 18000) and my income is not near the Roth IRA Phase out of $ 118k.

I have vested stock options from my company over the years that I could sell, but that will put me in the Roth IRA income phase out and it may even possible to put me over the income of 133K which makes me ineligible for 401k...
$133k does not make you ineligible to contribute to your 401k.
There is some sort of Highly Compensated Employee limit, buy I'm not an expert on that...

Sorry that was a typo. The 133k income limit is for roth ira

TIAX
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Re: Roth IRA: Income Limit Question

Post by TIAX » Thu May 11, 2017 9:58 am

xrw1 wrote: Sorry that was a typo. The 133k income limit is for roth ira
Start making IRA contributions using the Backdoor Roth IRA.

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BL
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Re: Roth IRA: Income Limit Question

Post by BL » Thu May 11, 2017 10:27 am

TIAX wrote:
Start making IRA contributions using the Backdoor Roth IRA.
+1
or wait until you have calculated your taxes next March and then either put in directly if you can or do the Backdoor Roth. You will need to file Form 8606 and send to IRS. Get a copy from IRS.gov along with directions and fill one out. You will be needing it someday if your income increases enough anyway.

xrw1
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Re: Roth IRA: Income Limit Question

Post by xrw1 » Thu May 11, 2017 10:56 am

I think I maybe a little confused.

Before I can make Traditional IRA contributions, wouldn't i have to take out the $5500 that I have in the Roth IRA first? I thought one can only contribute $5500 a year (single) total to IRA (Trad plus Roth).

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englishgirl
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Re: Roth IRA: Income Limit Question

Post by englishgirl » Thu May 11, 2017 11:46 am

In your situation, given that you have already contributed to your Roth IRA for this year, you would not withdraw the excess contribution. After you've figured out your taxes for the year, you would recharacterize whatever was excess as a traditional, non-deductible IRA. Vanguard can handle this for you, and will open a separate traditional IRA for that money - you don't need to worry about investment minimums for opening a new IRA account as long as it's just going in the same fund. So, if you end up with $324 that you weren't eligible to put in a Roth, that amount gets moved over to the new traditional IRA account.

Then you can convert your traditional IRA to a "backdoor" Roth IRA at some point.
Sarah

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FiveK
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Re: Roth IRA: Income Limit Question

Post by FiveK » Thu May 11, 2017 1:16 pm

englishgirl wrote:In your situation, given that you have already contributed to your Roth IRA for this year, you would not withdraw the excess contribution. After you've figured out your taxes for the year, you would recharacterize whatever was excess as a traditional, non-deductible IRA. Vanguard can handle this for you, and will open a separate traditional IRA for that money - you don't need to worry about investment minimums for opening a new IRA account as long as it's just going in the same fund. So, if you end up with $324 that you weren't eligible to put in a Roth, that amount gets moved over to the new traditional IRA account.

Then you can convert your traditional IRA to a "backdoor" Roth IRA at some point.
+1

See IRA recharacterization - Bogleheads and Backdoor Roth IRA - Bogleheads for some details.

xrw1
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Re: Roth IRA: Income Limit Question

Post by xrw1 » Fri May 12, 2017 8:46 am

I have read up on the links you guys provided. I have a better sense of a backdoor roth.

I still do have a question on "holding" time for the recharacterization. When i recharacterize to Traditional IRA, how many days do i need to hold that for before I can recharacterize to a Roth again. (Going from Roth -> Traditional -> Backdoor Roth). From the recharacterization links it appears that there are some holding periods before you can recharacterize again.


My Plan is:

1) Keep the 2017 Roth IRA money in the Roth IRA account
2) In early 2018 before I file taxes, figure out how much I have over contributed to the Roth IRA
3) Recharacterize the over contribution to a Traditional IRA
4) Wait a few days? or can I do the day after the tradtional IRA funds settles before I recharacterize to Roth IRA?
5) File Taxes with 8606 form

Does that sound right?


Thank you everyone!

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Earl Lemongrab
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Re: Roth IRA: Income Limit Question

Post by Earl Lemongrab » Fri May 12, 2017 4:34 pm

Be careful of terminology. You will NOT recharacterize to Roth, you will convert. There is no waiting period for that. Had you recharacterized a previous conversion, then there would be a waiting period.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

billfromct
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Re: Roth IRA: Income Limit Question

Post by billfromct » Fri May 12, 2017 7:49 pm

No where in the post is there mention if you have a tax deductible traditional IRA.

If you do, that will complicate the ability to perform a backdoor Roth IRA due to the Pro-rata rule. The Pro-rata rule (I believe that's the correct term) means if you have a tax deductible IRA, part of the traditional IRA conversation to the Roth IRA will be from the traditional tax deductible IRA & will be taxable. (I think I have that right, if not someone can correct me.)

If you don't have a tax deductible traditional IRA, you have nothing to worry about if you have to execute a backdoor Roth IRA.

bill

xrw1
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Re: Roth IRA: Income Limit Question

Post by xrw1 » Mon May 15, 2017 4:41 pm

I currently do not have a taxable IRA.

My Plan is (Updated)

1) Keep the 2017 Roth IRA money in the Roth IRA account
2) In early 2018 before I file taxes, figure out how much I have over contributed to the Roth IRA
3) OPEN a Traditional IRA and Recharacterize the over contribution to a Traditional IRA
4) After the traditional IRA funds settles convert the traditional IRA to Roth IRA
5) File Taxes with 8606 form


In another view, what happens if in 2018, i just apply the 2017 Roth to 2018? I know in 2018 I won't have this high income again. Do I get taxed on the appreciated portion of the 2017 Roth contribution?


Thank you
Last edited by xrw1 on Wed May 17, 2017 7:09 am, edited 1 time in total.

Alan S.
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Re: Roth IRA: Income Limit Question

Post by Alan S. » Mon May 15, 2017 5:55 pm

xrw1 wrote:I currently do not have a taxable IRA.

My Plan is (Updated)

1) Keep the 2017 Roth IRA money in the Roth IRA account
2) In early 2018 before I file taxes, figure out how much I have over contributed to the Roth IRA
3) OPEN a Traditional IRA and Recharacterize the over contribution to a Traditional IRA
4) After the traditional IRA funds settles convert the traditional IRA to Roth IRA
5) File Taxes with 8606 form


In another view, what happens if in 2018, i just apply the 2017 Roth to 2018? I know in 2018 I won't have this high income again. Do I get taxed on the appreciated portion of the 2017 Roth contribution?


Thank you,

Alan
If you remove your 2017 Roth contribution by requesting it's return, the earnings on that contribution must also be distributed to you and you would owe tax and penalty on the earnings amount. You could later make a 2018 Roth contribution using that money.

As for directly applying the contribution to 2018, that is only possible if the contribution is an actual excess contribution and you pay the 6% excise tax on it. In that case, you can leave the contribution in the Roth and apply it to 2018 (if eligible then) on Form 5329. You do not request any distribution. Earnings stay in the Roth when you pay the 6% excise tax. This is only wise if you have a very large amount of earnings on the contribution that you want to keep in the Roth since the 6% excise tax is costly and is usually more than the tax and penalty on the earnings.

xrw1
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Re: Roth IRA: Income Limit Question

Post by xrw1 » Wed May 17, 2017 9:43 am

When I re characterize over the Roth to traditional IRA. Do i have to tell Vanguard that it will be a non-deductible traditional ira?

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Earl Lemongrab
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Re: Roth IRA: Income Limit Question

Post by Earl Lemongrab » Wed May 17, 2017 10:15 am

xrw1 wrote:When I re characterize over the Roth to traditional IRA. Do i have to tell Vanguard that it will be a non-deductible traditional ira?
There is no such thing as a non-deductible IRA. There are only deductible and non-deductible contributions to TIRAs. The custodians has no need to know that information.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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