Earned too much for Roth

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geo99
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Earned too much for Roth

Post by geo99 »

My spouse and I both contributed the max to our personal Roths this year. After a raise we collectively make over the maximum. Neither of us have a personal IRA though I need to make one to roll over a 401k from a previous employer. One of our roths (mine) is at vanguard while my spouse has theirs at Fidelity. There are only a few weeks left in the year and wonder what the best move is for both of us. Thanks.
twh
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Re: Earned too much for Roth

Post by twh »

geo99 wrote: Sat Dec 09, 2023 1:08 am My spouse and I both contributed the max to our personal Roths this year. After a raise we collectively make over the maximum. Neither of us have a personal IRA though I need to make one to roll over a 401k from a previous employer. One of our roths (mine) is at vanguard while my spouse has theirs at Fidelity. There are only a few weeks left in the year and wonder what the best move is for both of us. Thanks.
When you say "After a raise we collectively make over the maximum"...are you computing your year end AGI and you are over? Or if you had the new salary the whole year you'd be over? Because, only this year's AGI matters.
little_star
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Re: Earned too much for Roth

Post by little_star »

geo99 wrote: Sat Dec 09, 2023 1:08 am My spouse and I both contributed the max to our personal Roths this year. After a raise we collectively make over the maximum. Neither of us have a personal IRA though I need to make one to roll over a 401k from a previous employer. One of our roths (mine) is at vanguard while my spouse has theirs at Fidelity. There are only a few weeks left in the year and wonder what the best move is for both of us. Thanks.
If you have excess contributions, you need to remove them. You have two choices: (1) withdraw or (2) re-characterize. Whichever you choose, you should do so by contacting the custodian - do not simply withdraw the funds yourself, as that will not be coded correctly on the 1099. If you choose (2), that will set you up for the possibility of a backdoor Roth process, where you make a non-deductible contribution to a traditional IRA followed by a Roth conversion. Both the non-deductible contribution and the Roth conversion are documented on IRS Form 8606. You should look at (fill out) a draft version of IRS Form 8606 before you start the backdoor Roth process so that you understand the possible tax consequences.

The possible tax consequences for a backdoor Roth process are mostly due to the pro-rata rule. If you have significant pre-tax $$ in a traditional IRA, your Roth conversion will be pro-rated between the post-tax and pre-tax $$. If you are in a high tax bracket (expected if you exceed the income limits for a direct Roth contribution), this means that you will be converting pre-tax $$ at a high marginal tax rate. Since you say "I need to make one to roll over a 401k from a previous employer", this suggests that you are not a good candidate for the backdoor Roth process. If, instead, you were to rollover your prior 401k to your current 401k (or leave it where it is), then you would leave yourself the option to complete the backdoor Roth process now and in the future.
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geo99
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Re: Earned too much for Roth

Post by geo99 »

To clarify: we earned over the AGI limit *this* year and I’m trying to figure out what to do before the end of the calendar year. Psychologically I’d prefer to keep this money in retirement accounts unless the tax hit is going to be massive. I’m not trying to optimize to save a small amount of money. We maxed out work 401ks and I also maxed our HSA. Have been paying for medical expenses out of pocket. Is removing the $6500 as easy as asking for it to be given back?
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retiredjg
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Re: Earned too much for Roth

Post by retiredjg »

geo99 wrote: Sat Dec 09, 2023 1:08 am My spouse and I both contributed the max to our personal Roths this year. After a raise we collectively make over the maximum. Neither of us have a personal IRA though I need to make one to roll over a 401k from a previous employer. One of our roths (mine) is at vanguard while my spouse has theirs at Fidelity. There are only a few weeks left in the year and wonder what the best move is for both of us. Thanks.
Agree with little_star. Your choices are to recharacterize to traditional IRA or have the contributions and associated earnings removed and returned to you.

1. Re-characterize to tIRA. The ONLY reason to do this is to use the backdoor Roth method to contribute to Roth IRA in 2023 (information in Wiki). Many people do this, but it is not a slam dunk in my book. A good number of people mess it up and unwinding the mess is a hassle. Also, if you do decide to use the backdoor Roth process, you cannot roll the 401k into IRA as it will interfere (cause pro-rating).

I'm not saying this would be a bad decision, but it is not one to make lightly because the first time is not so easy for some people. If you have many years till retirement, you might be willing to put in the effort to do that. If you are retiring soon, I would not bother.


2. Have the contributions returned. You can have the contribution and associated earnings removed and returned to up up until tax day (or even October 15 in most cases). You can then invest that money into a taxable account which is not quite as good as Roth IRA, but good enough. The earnings will be taxable with 2023 taxes. This is the easiest and best answer unless you want to get involved with backdoor Roth for a number of years.

Both of these choices require action by your custodian. Do not just take the money out yourself because it will look like a plain old withdrawal and will be coded wrong on the 1099.
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Re: Earned too much for Roth

Post by RyeBourbon »

Don't roll the 401k into an IRA. If you don't have any other IRA's (with deducted pre-tax money), then recharacterize your Roth contribution to a new traditional IRA and then convert to Roth. It's called a backdoor Roth. If you have other pre-tax money in an IRA, then it will cause some of the conversion to be taxable ("pro-rata"). As long as you have no pre-tax IRA money you can do this every year regardless of AGI. Contribute to the traditional IRA and convert to Roth. You will not deduct the contribution and you will need to have a form 8606 with your return.
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Navillus1968
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Re: Earned too much for Roth

Post by Navillus1968 »

geo99 wrote: Sat Dec 09, 2023 1:08 am My spouse and I both contributed the max to our personal Roths this year. After a raise we collectively make over the maximum. Neither of us have a personal IRA though I need to make one to roll over a 401k from a previous employer. One of our roths (mine) is at vanguard while my spouse has theirs at Fidelity. There are only a few weeks left in the year and wonder what the best move is for both of us. Thanks.
If you expect your MAGI to be above the Roth contribution limit going forward, then to preserve your ability to make backdoor Roth contributions, you should let your previous employer's 401k just sit there or do a rollover to your current employer's 401k- do NOT perform a rollover to a Trad IRA.
If you do a 401k rollover to TIRA, then your ability to make future backdoor Roth IRA contributions will be closed off, due to the pro rata rule causing heavy taxation of Roth conversions.
Note that your wife's ability to make backdoor Roth contributions will be unaffected if you (foolishly) do a rollover of your 401k to your TIRA, since each person's IRA has a separate pro rata rule.

As others have suggested, contact your Roth IRA custodian & request a re-characterization of your Roth contribution as a TIRA contribution. Once the
re-characterization is done, you can then convert those funds back to Roth, which is the backdoor Roth process.
Note that this conversion will be tax-free, since all of the funds in your TIRA & your wife's TIRA will be post-tax.
The pro rata rule will be invoked if you own any flavor of Trad IRA (other than inherited IRAs, which don't count for pro rata purposes)- so this means no traditional IRAs, no employer plan rollover IRAs, no SEP-IRAs, and no SIMPLE IRAs. At tax time, the IRS considers all these types to be one single Trad IRA in your name. Same goes for your wife- to avoid the pro rata rule, she can't have any pre-tax money in any type of TIRA.

In 2024 & beyond, you will do the backdoor Roth process from the start- contribute non-deductible money to your & DW's TIRAs & then perform a conversion of the funds to his & hers Roth IRA, skipping the re-characterization step, of course!
Note- If there is any risk that your income will above the direct Roth contribution MAGI limit in a given year, just use the BDR process. Re-characterization is easy, but life is simpler when you just use BDR from the get-go.

Read the wiki-
https://www.bogleheads.org/wiki/Backdoor_Roth
https://www.bogleheads.org/wiki/IRA_recharacterization

Great BDR tutorial- https://www.whitecoatinvestor.com/backd ... ial/#steps
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celia
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Re: Earned too much for Roth

Post by celia »

geo99 wrote: Sat Dec 09, 2023 8:34 am To clarify: we earned over the AGI limit *this* year and I’m trying to figure out what to do before the end of the calendar year. Psychologically I’d prefer to keep this money in retirement accounts unless the tax hit is going to be massive. I’m not trying to optimize to save a small amount of money.
Earlier, you said your income is now higher because of a "raise". That means to us not only will your AGI be higher this year, but also in the years going forward. What you do now not only impacts this year, but also future years. So you should be thinking of the big picture, not just this year's taxes.

Why do you want to move your 401K in the first place? If it has a small-ish amount, would you be willing to convert it this year or over 2 or 3 years? Since the pro rata rule would apply to all future Roth conversions and tIRA withdrawals until the tIRAs are empty on December 31 one year, we strongly encourage you to not do the 401k rollover. See the Backdoor Roth wiki page for a detailed discussion of this. In fact, since this would be the first time you are doing this, you should understand the entire wiki page and fill out a blank Form 8606 (found at IRS.gov) for each of you for practice and to reinforce your understanding. This is not an easy page to read, so take your time since what you do now will impact you for the long term. (When you retire, you will be glad you did this.)

Is removing the $6500 as easy as asking for it to be given back?
Yes and no. It is easy to ask but understanding the later tax reporting takes some effort. The amount that will be returned (or recharacterized) will be adjusted to also include growth (or loss) since the money was put in the Roth. The custodian is responsible for calculating that growth. If you remove it to taxable, both the former contribution and growth will be taxed for this year. If you recharacterize it to a tIRA, the IRS will see it as if it had been put there in the first place. You will mark that IRA contribution as non-deductible when you do your taxes. Then when you convert that money to Roth, the contributed amount will not be taxed (because you were already paying taxes on it when it was not deducted). But the growth will be taxed as ordinary income.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
geo99
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Fixing excess Roth contribution on 2023 taxes

Post by geo99 »

[Thread merged into here --admin LadyGeek]

My partner and I both contributed the max to our Roth's last year (2023) but ended up earning too much for any contribution. Their Roth is at Fidelity, mine is at Vanguard. We both successfully completed withdraws of $6,500 plus what was assessed as gains. Fidelity required 10% taken out for federal taxes, but otherwise no taxes were withheld.

I'm doing our taxes, using Turbotax. I don't yet have 1099-Rs for either of us and in any case can't figure out where to get the information to enter excess contribution info for 2023. Turbotax seems to only want to ask for the year prior since it assumes I would only get a 1099-R the following year. I guess a lot of people don't realize they overcontributed until they've already filed. In this case we realized beforehand (last year actually) and withdrew the money last month. We didn't want to deal with transferring to an IRA though I'm wondering now if we should have done that.

Neither of us has IRAs. My partner has a traditional 401k, I have a traditional 401k and small Roth 401k at Fidelity with a former employer, and a new one of each at Vanguard. I should streamline but for the time being just would love some help figuring out how to enter this in my taxes before the deadline!
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Re: Earned too much for Roth

Post by LadyGeek »

geo99 - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Earned too much for Roth

Post by placeholder »

How were the contributions removed as return or recharacterization and did you both do it the same way as the spouse had no problem with backdoor roth in the initial message and you would have only if you did the rollover.
Topic Author
geo99
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Re: Earned too much for Roth

Post by geo99 »

Thank you for consolidating. I wasn’t sure if folks would be confused by the original thread.

We have not done anything besides return the excess plus gains through the form/pages earmarked for this purpose by vanguard and fidelity. So I have 6500 plus around 800 in gains being sent back for each account. My question is how to reflect this in our taxes since TurboTax, at least, doesn’t have an obvious way to enter for the current filing year.
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Re: Earned too much for Roth

Post by placeholder »

geo99 wrote: Tue Apr 02, 2024 10:18 pm Thank you for consolidating. I wasn’t sure if folks would be confused by the original thread.

We have not done anything besides return the excess plus gains through the form/pages earmarked for this purpose by vanguard and fidelity. So I have 6500 plus around 800 in gains being sent back for each account. My question is how to reflect this in our taxes since TurboTax, at least, doesn’t have an obvious way to enter for the current filing year.
Why did your spouse do that with no ira?
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retiredjg
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Re: Earned too much for Roth

Post by retiredjg »

geo99 wrote: Tue Apr 02, 2024 10:18 pm My question is how to reflect this in our taxes since TurboTax, at least, doesn’t have an obvious way to enter for the current filing year.
I don't know the answer for sure, but try this.

In the interview questions, tell TT you made a Roth IRA contribution in 2023. In the questions that follow, tell TT that you changed your mind and had the contributions removed/returned to you. You may get a box where you enter an explanation. Say something like "I contributed ___ to Roth IRA on ___ and had the contribution and earnings (____) returned to me on ______."

I think that following this instruction will give you a way to enter the associated earnings as taxable income.

You are not the first to ask this question this week. If you would, please tell us the steps that work so this information can be passed on to others.
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