Roth MAGI too high multiple years?

[facility-iodine-4]

Hello Bogleheads!

I have a question about the MAGI when it pertains to a Roth IRA. I was about to max out the $6k into my Roth for the 2020 year and noticed that not only am I above the MAGI for 2020, but I was also over for 2019. I calculated my MAGI for 2019 using my tax returns and it came out to $141,629. I got a raise this year so 2020 will be even higher.

However I maxed out my Roth for 2019, and now I put in about $3k into my Roth for 2020.

I guess my question is did I calculate my MAGI correctly and if I did, what do I need to do to fix this situation for 2019 and 2020? I assume I need to take the money out of the Roth and do a backdoor Roth? However if I take money out of my Roth am I going to get hit with a penalty, do I have to pay taxes?

Here is how I calculated my MAGI:
1. AGI : $141,629
2. Convert to Roth : $0
3. Total : $141,629
4. tIRA dedt : $0
5. Student loan interest : $0
6. Tuition/fees dedt : $0
7. Foreign earned income : $0
8. foreign housing dedt : $0
9. savings bond interest : $0
10. employer adoption benefits : $0
11. Total : $141,629
12. head of household filing : $137,000

Thanks!

[go2run]

Based on your question, I assume that you are file taxes as an individual? If so, the phase out range is between $124,000-$139,000.

For Year 2019:
If you file as an individual, and your 2019 AGI on your tax returns (Form 1040 line 8b) is over $139,000, then you can not contribute to a Roth. If that is truly the case, then you will need to either withdraw your contribution (+ whatever gains you have from it) or recharacterize your contribution (+ whatever gains you have from it). Tax law will impose a 6% tax penalty on the excess for each year it remains in the IRA. This would generally need to be done by Oct 15 of the tax year (in this case 2020). You have an option to carry forward the excess contribution but since your AGI is too high for 2020, that won't work.

For Year 2020:
You haven't done your taxes yet, so you can either withdraw your contribution or recharacterize (+ whatever gains from the contribution). This happened to me before. The process is simple. Call the Roth IRA Plan administrator (e.g. Fidelity, Vanguard, wherever you have the plan), and they will help you with the reversal process. You will need to know the contribution + gains on the contribution as you will be taxed on the gains as ordinary income.

[Flyer24]

Welcome to the forum. Just for reference, only the first letter is capitalized in “Roth”. It is a reference to Senator William Roth.

[facility-iodine-4]

Based on your question, I assume that you are file taxes as an individual? If so, the phase out range is between $124,000-$139,000.

I filed as Head of Household.

For Year 2019:
If you file as an individual, and your 2019 AGI on your tax returns (Form 1040 line 8b) is over $139,000, then you can not contribute to a Roth. If that is truly the case, then you will need to either withdraw your contribution (+ whatever gains you have from it) or recharacterize your contribution (+ whatever gains you have from it). Tax law will impose a 6% tax penalty on the excess for each year it remains in the IRA. This would generally need to be done by Oct 15 of the tax year (in this case 2020). You have an option to carry forward the excess contribution but since your AGI is too high for 2020, that won't work.

Since Oct 15th 2020 has come and gone I'm not sure what I can do. I assume I was already imposed a 6% tax penalty, but I'm not sure where that would be?

1. Since Oct 15th 2020 has come and gone, what do I need to do?
2. Where would I see the 6% penalty? In my Roth, on my tax returns?

For Year 2020:
You haven't done your taxes yet, so you can either withdraw your contribution or recharacterize (+ whatever gains from the contribution). This happened to me before. The process is simple. Call the Roth IRA Plan administrator (e.g. Fidelity, Vanguard, wherever you have the plan), and they will help you with the reversal process. You will need to know the contribution + gains on the contribution as you will be taxed on the gains as ordinary income.

When you say recharacterize, would that mean recharacterize it has Traditional IRA money?

Thanks for your help!

[Alan S.]

It is too late to recharacterize your 2019 contribution or remove it with earnings. You have incurred the 6% excise tax on the amount of the excess. You can report that on a Form 5329 for 2019 without amending your return.

It also appears that your continued MAGI figures will not allow you to absorb the excess from 2019 as a later year contribution, so you need to remove it as a normal distribution. That means your earnings stay in the Roth and you would just request a distribution of 6000. Too bad you did not do that by year end 2020, because your 2019 excess has now added another 6% excess charge for 2020 since it was still in the Roth. You can add the 2020 5329 to your 2020 return.

Actually, some people have enough gains on their prior contributions that paying the excise tax is less costly than removing the contribution with earnings and paying tax plus penalty on the earnings. The 6000 distribution can wait until late in 2021 since you do not incur another excise until 1/1/2022. But you will have to report the 6000 distribution on Form 8606 on your 2021 taxes, but there will not be any tax due because you are just withdrawing from your regular contribution balance.

As for your 3000 2020 excess, you can either withdraw it with earnings (deadline to act is 10/15/2021) or recharacterize it as a TIRA contribution. However, if you are participating in a workplace retirement plan, you will not be able to deduct that TIRA contribution and you would have to report it as non deductible on Form 8606 for 2020. If you do NOT have any pre tax TIRA amounts, you can and should be doing back door Roths every year and you will not have to worry about where your MAGI ends up. Just make a TIRA non deductible contribution from the start and convert it to Roth right away.

Before recharacterizing 2020, let us know if you already have a TIRA account including a rollover IRA. If so, we can go into options for dealing with that.

[facility-iodine-4]

It is too late to recharacterize your 2019 contribution or remove it with earnings. You have incurred the 6% excise tax on the amount of the excess. You can report that on a Form 5329 for 2019 without amending your return.

It also appears that your continued MAGI figures will not allow you to absorb the excess from 2019 as a later year contribution, so you need to remove it as a normal distribution. That means your earnings stay in the Roth and you would just request a distribution of 6000. Too bad you did not do that by year end 2020, because your 2019 excess has now added another 6% excess charge for 2020 since it was still in the Roth. You can add the 2020 5329 to your 2020 return.

Actually, some people have enough gains on their prior contributions that paying the excise tax is less costly than removing the contribution with earnings and paying tax plus penalty on the earnings. The 6000 distribution can wait until late in 2021 since you do not incur another excise until 1/1/2022. But you will have to report the 6000 distribution on Form 8606 on your 2021 taxes, but there will not be any tax due because you are just withdrawing from your regular contribution balance.

As for your 3000 2020 excess, you can either withdraw it with earnings (deadline to act is 10/15/2021) or recharacterize it as a TIRA contribution. However, if you are participating in a workplace retirement plan, you will not be able to deduct that TIRA contribution and you would have to report it as non deductible on Form 8606 for 2020. If you do NOT have any pre tax TIRA amounts, you can and should be doing back door Roths every year and you will not have to worry about where your MAGI ends up. Just make a TIRA non deductible contribution from the start and convert it to Roth right away.

Before recharacterizing 2020, let us know if you already have a TIRA account including a rollover IRA. If so, we can go into options for dealing with that.

I do have a rollover IRA, but no other TIRA account. The rollover is from an old 401k at a previous company.

So If I'm understanding it correctly for 2019: Remove the $6000 from my Roth I put in for year 2019 as a distribution. No tax due, but I will get penalized (6% * 2)

[facility-iodine-4]

I've read a lot of the bogleheads wiki and here is my plan to fix this issue.

* Remove $6k from my Roth that I put for year 2019. Open a traditional IRA and deposit the 6k there (nondeductible), convert it into a Roth IRA ASAP, aka backdoor Roth.
* Withdraw the money I put into the Roth IRA for 2020, look into funding a mega backdoor Roth with that money.

I have a rollover IRA, but I think I don't want to put money in there for the Roth IRA as it already has pre-tax dollars, is that correct?

[facility-iodine-4]

Looking into this more it looks like I didn't contribute to my Roth for 2019 like I thought. So really I just have $2,306.25 that I put into the Roth earlier this year, which I already invested into ETFs. I also have $3,372.53 that I put in earlier this month that is still in cash.

After reading more about the rollover IRA, it looks that will cause tax issues with a backdoor Roth, so I need to look at fixing that first.