Roth IRA error

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Topic Author
Andyrunner
Posts: 856
Joined: Thu May 03, 2012 9:14 am

Roth IRA error

Post by Andyrunner »

Thankfully for the most part I think I'll be safe but need to pass it to crowd for their opinion.

Our MAGI is typically about $170k and will probably go down with my wife enrolling in a 457b this year but that will be offset by a promotion I will get. Last year for the first time I did the backdoor Roth for both of us no problem, don't need to but income can increase so figured why not, its easy.

This year, I went to do the same thing, and of course me, being a dummy, doing 10 things at once, I did the backdoor roth for me, my wife, I contributed straight to the Roth :oops: . Now I really don't expect our MAGI to get much higher, so I think I'm ok. Even if I wanted to, we can contribute more to the 457b to decrease it. But my question is: Will there be a redflag if one person did a Roth and one person did a backdoor roth?

I started this all 2 days ago, so wondering if I can reverse it, but I'm guessing not and no need to complicate things.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Roth IRA error

Post by DSInvestor »

Roth IRA and Traditional IRA offer a recharacterization feature.

See Fairmark's page on Recharacterizations:
https://fairmark.com/retirement/roth-ac ... rizations/

Note there have been some recent rule changes and recharactsrizations of Roth conversions is no longer an option. Recharacterizations of contributions is still available and applicable to your situation.

Here is a Vanguard page on recharacterizations:
https://investor.vanguard.com/ira/ira-r ... terization
Wiki
Topic Author
Andyrunner
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Joined: Thu May 03, 2012 9:14 am

Re: Roth IRA error

Post by Andyrunner »

Good read, so by chance if the family does go over the amount, we can recharacterize. For now I'll probably just leave it.
Badger2017
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Joined: Sat Jun 05, 2021 9:05 am

Re: Roth IRA error

Post by Badger2017 »

My family encountered this exact situation in 2021 for the first time and ended up recharacterizing nearly 6 months after our initial contributions when we realized our MAGI would be too high for direct Roth contributions.

The amount that is recharacterized is your initial contribution plus/minus and earnings or loss attributable to the contribution. For us, it meant we had to recharacterize a total of $13,500 on $12,000 of contributions. That amount can then be converted to your Roth IRA, but we will be paying tax on the $1,500 of earnings on our 2021 taxes. If you think you are going to be straddling the MAGI limit, I would recommend recharacterizing sooner than later to avoid this scenario where your account has time to grow and you pay taxes on earnings.

We made the decision to go through the backdoor process right at the beginning of 2022 even knowing our MAGI will be somewhere around the phaseout range (possibly lower, possibly higher) to avoid this specific scenario again.
OldSport
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Joined: Tue Jul 25, 2017 7:01 pm

Re: Roth IRA error

Post by OldSport »

Is it "safe" to do a backdoor Roth in 2022? We very much want to do backdoor roths in 2022, but do not want to have to pull it out "unwind it"? - it is much better for us to have it sitting in taxable vs. an After Tax Traditional IRA.
Topic Author
Andyrunner
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Joined: Thu May 03, 2012 9:14 am

Re: Roth IRA error

Post by Andyrunner »

It is since nothing was passed in 2021. I can't see the gov't making us undo anything for this year. If anything they would make it for future years.
nolesrule
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Re: Roth IRA error

Post by nolesrule »

OldSport wrote: Fri Jan 21, 2022 3:35 pm Is it "safe" to do a backdoor Roth in 2022? We very much want to do backdoor roths in 2022, but do not want to have to pull it out "unwind it"? - it is much better for us to have it sitting in taxable vs. an After Tax Traditional IRA.
It is not prohibited by law.
Topic Author
Andyrunner
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Joined: Thu May 03, 2012 9:14 am

Re: Roth IRA error

Post by Andyrunner »

Badger2017 wrote: Fri Jan 21, 2022 2:26 pm My family encountered this exact situation in 2021 for the first time and ended up recharacterizing nearly 6 months after our initial contributions when we realized our MAGI would be too high for direct Roth contributions.

The amount that is recharacterized is your initial contribution plus/minus and earnings or loss attributable to the contribution. For us, it meant we had to recharacterize a total of $13,500 on $12,000 of contributions. That amount can then be converted to your Roth IRA, but we will be paying tax on the $1,500 of earnings on our 2021 taxes. If you think you are going to be straddling the MAGI limit, I would recommend recharacterizing sooner than later to avoid this scenario where your account has time to grow and you pay taxes on earnings.

We made the decision to go through the backdoor process right at the beginning of 2022 even knowing our MAGI will be somewhere around the phaseout range (possibly lower, possibly higher) to avoid this specific scenario again.
Yeah, I think we are for sure going to be well below. So I'm just going to sit tight. If something odd happens, I'll adjust later on. I was just concerned about doing one backdoor and one regular.
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retiredjg
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Re: Roth IRA error

Post by retiredjg »

Andyrunner wrote: Fri Jan 21, 2022 1:29 pm But my question is: Will there be a redflag if one person did a Roth and one person did a backdoor roth?
I would not think so. Both are accepted practices and neither requires that it be the only possible path to Roth.

If your income goes too high, she might have to re-characterize and convert to Roth....assuming no IRAs on the side.
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retiredjg
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Re: Roth IRA error

Post by retiredjg »

OldSport wrote: Fri Jan 21, 2022 3:35 pm Is it "safe" to do a backdoor Roth in 2022? We very much want to do backdoor roths in 2022, but do not want to have to pull it out "unwind it"? - it is much better for us to have it sitting in taxable vs. an After Tax Traditional IRA.
Nobody knows. My money is on the idea that what has been done will be left alone. But Congress can and does do some very strange things :happy so I would not bet a large amount either way on this.
Topic Author
Andyrunner
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Re: Roth IRA error

Post by Andyrunner »

So update on this. I finally had some free time last night and after filing 2021 taxes I plucked around on Turbotax for 2021. I removed our 1099Rs and put one IRA as a traditional and one as a Roth. It said that my wife made too much MAGI (single limit) and couldn't deduct the IRA on our taxes.

What I found odd was that we typically file jointly. Why did it bring up MAGI for single? Is it because it didn't go through the complete checklist and assign us to file jointly?
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