Withdraw from Roth IRA to contribute to TIRA now? (potential income limit tax issues)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
EngineerEd
Posts: 15
Joined: Fri Aug 02, 2013 3:56 pm

Withdraw from Roth IRA to contribute to TIRA now? (potential income limit tax issues)

Post by EngineerEd » Tue Feb 13, 2018 1:21 am

Hi all,

I have been investing at regular intervals (every month) into my Roth IRA since starting work almost 2 years ago. However it dawned upon me recently that I may run into the income limit for Roth IRA this year (TY2018, $120K linear phase out to $135K). I am not completely sure that I will hit the limit, due to the variable nature of compensation (i.e. heavily bonus based), but I'd put it at 85% odds that I exceed $120K in MAGI (modified adjusted gross income), and maybe 25% odds that I exceed $135K. I already contributed $550 to my Roth IRA for 2018 in early-mid January. At the beginning of February I realized this may be an issue so I started a Traditional IRA and contributed $450 there instead. Both accounts are at Vanguard.

Before anyone inquires, I am already contributing the max to my (traditional) 401k. My MAGI for last year was approximately $97K. Between a hefty income raise received in mid-late 2017 and expected bonus range (depends on personal+firm performance), I expect my MAGI to be between $115K and $145K. If I had to guess based on firm performance so far this year and historically, I will probably land in the $125-130K range (in MAGI).

Also before anyone points this out, I do realize that with $550 in my Roth IRA this year I could invest the remaining $4950 in my traditional IRA and I'd be fine as long as my MAGI comes in under $133,500 ($135K - 10% of the $15K linear phase out). So I could do nothing with the $550 already in Roth for 2018 and probably be fine. If I did this and I do exceed the 133.5K (what a problem to have!), I'd deal with this sometime before filing taxes for the 2018 tax year.

So I've been doing some research into what people have done when they accidentally contribute to their Roth IRA and then exceed the income limit. It seems the 2 best options I have are to "reclassify" my Roth IRA contributions for this year to a Traditional IRA (this would presumably involve calling Vanguard and jumping through a bunch of hoops and figuring out how to only reclassify a small part of my Roth IRA) or withdraw the $550 + any earnings on those contributions and then deposit them instead to my Traditional IRA account. The latter seems simpler if I don't have to deal with earnings on contributions. That big if is why I am thinking this might be the opportune time. As I'm sure many of you have noticed, the market has been in a bit of a dip lately, so undoubtedly the $550 I contributed in early-mid Janaury did not actually grow (i.e. no earnings accrued).

So my question is, can it really be as simple as that? Can I just sell some ETFs (does it matter which ETFs/funds I sell?) in my Roth IRA and withdraw $550 and then I will be freed from any potential tax complications in case I exceed the income limit?

Thanks in advance!

mhalley
Posts: 5402
Joined: Tue Nov 20, 2007 6:02 am

Re: Withdraw from Roth IRA to contribute to TIRA now? (potential income limit tax issues)

Post by mhalley » Tue Feb 13, 2018 1:28 am

Do you still want to contribute to the Roth? If so, recharacterize the Roth contribution to traditional, then contribute to the traditional Ira and do a backdoor Roth. You need to wait 30 days before doing the backdoor Roth.

https://www.rothira.com/5-questions-rot ... erizations

User avatar
Earl Lemongrab
Posts: 3632
Joined: Tue Jun 10, 2014 1:14 am

Re: Withdraw from Roth IRA to contribute to TIRA now? (potential income limit tax issues)

Post by Earl Lemongrab » Tue Feb 13, 2018 3:57 pm

mhalley wrote:
Tue Feb 13, 2018 1:28 am
Do you still want to contribute to the Roth? If so, recharacterize the Roth contribution to traditional, then contribute to the traditional Ira and do a backdoor Roth. You need to wait 30 days before doing the backdoor Roth.
There's no waiting period for conversion following a recharacterization of contributions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Post Reply