Invested in ROTH IRA but I appear to have crossed $186K mark

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dbk
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Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sat Jan 13, 2018 12:45 am

Dear all,

I am single earner in my family and do joint tax returns here in California. I probably jumped the gun and already invested $5,500 in ROTH IRA. Per my rough calculations my MAGI would fall between $186K and $190K for sure. Due to this, I understand I could be able to invest only less than $5,500 in to ROTH IRA. Please help let me know next steps that I must take.
Last edited by dbk on Sun Jan 14, 2018 1:08 pm, edited 1 time in total.

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sergeant
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by sergeant » Sat Jan 13, 2018 12:50 am

Call your provider and they will assist you with the easiest way to handle it. Have you looked into the backdoor Roth?
Lincoln 3 EOW!

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sat Jan 13, 2018 12:59 am

sergeant wrote:
Sat Jan 13, 2018 12:50 am
Call your provider and they will assist you with the easiest way to handle it. Have you looked into the backdoor Roth?
Thank you - I'll check with my provider (vanguard). I wasn't sure if they will be able to help.

BTW, I just learnt about backdoor ROTH IRA. If my understanding is correct, I can do backdoor ROTH IRA for $5,500 in each account (in wife's and my account) irrespective of my income for Year 2017 - Is this correct?

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celia
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by celia » Sat Jan 13, 2018 1:04 am

dbk wrote:
Sat Jan 13, 2018 12:45 am
I probably jumped the gun and already invested $5,500 in ROTH 401K. Per my rough calculations my MAGI would fall between $186K and $190K for sure. Due to this, I understand I could be able to invest only less than $5,500 in to ROTH IRA. Please help let me know next steps that I must take.
Please clarify if you meant "Roth IRA" for both references or is it correct as written?
BTW, I just learnt about backdoor ROTH IRA. If my understanding is correct, I can do backdoor ROTH IRA for $5,500 in each account (in wife's and my account) irrespective of my income for Year 2017 - Is this correct?
Yes, BUT you need to be aware of the pro-rata rule if either of you have any existing type of traditional IRAs (Traditional, Rollover, SEP, SIMPLE) at any custodian. The IRS regards all your traditional IRAs as one big IRA when it comes to paying taxes on the conversion. This can also become an annoying paperwork filing nightmare each year you convert or withdraw from any of these accounts.
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.

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sat Jan 13, 2018 1:19 am

celia wrote:
Sat Jan 13, 2018 1:04 am
dbk wrote:
Sat Jan 13, 2018 12:45 am
I probably jumped the gun and already invested $5,500 in ROTH 401K. Per my rough calculations my MAGI would fall between $186K and $190K for sure. Due to this, I understand I could be able to invest only less than $5,500 in to ROTH IRA. Please help let me know next steps that I must take.
Please clarify if you meant "Roth IRA" for both references or is it correct as written?
Sorry - I meant ROTH IRA.
celia wrote:
Sat Jan 13, 2018 1:04 am
dbk wrote:
Sat Jan 13, 2018 12:45 am
BTW, I just learnt about backdoor ROTH IRA. If my understanding is correct, I can do backdoor ROTH IRA for $5,500 in each account (in wife's and my account) irrespective of my income for Year 2017 - Is this correct?
Yes, BUT you need to be aware of the pro-rata rule if either of you have any existing type of traditional IRAs (Traditional, Rollover, SEP, SIMPLE) at any custodian. The IRS regards all your traditional IRAs as one big IRA when it comes to paying taxes on the conversion. This can also become an annoying paperwork filing nightmare each year you convert or withdraw from any of these accounts.
I or my wife don't have any IRA accounts except the one that we talked about above. So, now we don't need to worry about pro-rata rule, right?

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sergeant
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by sergeant » Sat Jan 13, 2018 1:58 am

Correct, you don't need to worry about pro-rata rule if no other IRA's. Vanguard has information on backdoor Roth on their website and check our wiki here.
Lincoln 3 EOW!

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sun Jan 14, 2018 12:35 pm

On the other hand, from the above discussions, what I understand is that MFJ (Married Filing Jointly) folks can contribute 2x$5,500 (Husband + Wife) in to separate non-deductible traditional IRAs upfront in the year 2018 ($5,500 in to each) and later convert them to ROTH IRA before tax filing if income of the same year is greater than $189,000.

1) Is this understanding correct?
2) By doing above, if we fall short of $189,000 income, how can we deal the situation to make this amount to ROTH IRA?
3) Is this a better thing to do or just wait until W2 and 1099s etc are generated for the year?

Sorry if I am too pedantic. I am just trying to understand.

PFInterest
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by PFInterest » Sun Jan 14, 2018 12:49 pm

dbk wrote:
Sun Jan 14, 2018 12:35 pm
On the other hand, from the above discussions, what I understand is that MFJ (Married Filing Jointly) folks can contribute 2x$5,500 (Husband + Wife) in to separate non-deductible traditional IRAs upfront in the year 2018 ($5,500 in to each) and later convert them to ROTH IRA before tax filing if income of the same year is greater than $189,000.

1) Is this understanding correct?
2) By doing above, if we fall short of $189,000 income, how can we deal the situation to make this amount to ROTH IRA?
3) Is this a better thing to do or just wait until W2 and 1099s etc are generated for the year?

Sorry if I am too pedantic. I am just trying to understand.
hi, slow down here:
1) please edit your first post. did you use a roth 401k but you meant IRA? or did you use both? i wouldnt use a r401k in CA at your income.
2) yes your income qualifies for your wifes IRA. you both can get 5500
3) yes, if your MAGI is above the limit you cannot directly contribute. You also make too much to deduct a tIRA. this is where the backdoor rIRA comes in.
heres a step by step walkthrough: https://www.whitecoatinvestor.com/backd ... -tutorial/
4) yes, you can also do the conversion anyways if you are not sure you will be over the limit. then you wont have to go back and undo anything. someone at 100K could backdoor as well.....its just extra work for them as they could have directly contributed in the first place.
5) lastly, you can still contribute for 2017 until april. now you know your MAGI it can be direct or backdoor depending on your situation. you can also do 2018 at the same time. then you would convert if needed. dont forget the 8606 if you backdoor.

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sun Jan 14, 2018 1:20 pm

PFInterest wrote:
Sun Jan 14, 2018 12:49 pm
hi, slow down here:
1) please edit your first post. did you use a roth 401k but you meant IRA? or did you use both? i wouldnt use a r401k in CA at your income.
I apologize, I edited the my initial post now (I didn't know I could edit)
PFInterest wrote:
Sun Jan 14, 2018 12:49 pm
4) yes, you can also do the conversion anyways if you are not sure you will be over the limit. then you wont have to go back and undo anything. someone at 100K could backdoor as well.....its just extra work for them as they could have directly contributed in the first place.
That's a good point. In this particular case you brought up, a MFJ at income of 100K but had already contributed to traditional IRA 2x$5,500, what is the work involved to claim tax benefit on 2x$5,500 after converting to ROTH IRAs? Just 8606 form? Anything else?

Basically, if I (MFJ) contribute 2x$5,500 to non-deductible traditional IRA for Year 2018 and earn less than $150,000 and convert the same to ROTH IRAs, can I show the backdoor ROTH IRA for income tax benefits for Yr 2018? and, If I can benefit from 2018 Income Tax, what is the work involved?

smokeycanoe
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by smokeycanoe » Sun Jan 14, 2018 1:25 pm

I agree with the back door approach. I use it too.

I wanted to mention that Roth is someone's name, not an acronym, so no need for the caps lock key.

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Duckie
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by Duckie » Sun Jan 14, 2018 5:15 pm

dbk wrote:In this particular case you brought up, a MFJ at income of 100K but had already contributed to traditional IRA 2x$5,500, what is the work involved to claim tax benefit on 2x$5,500 after converting to ROTH IRAs? Just 8606 form? Anything else?
What exactly do you mean by "tax benefit"? Do you mean a taxable deduction? Because deductions are limited by income and employer plans. Here are the deduction income limits for 2017 and 2018.

In the above case on an income of $100K both spouses can take the full deduction even if they were both covered by employer plans. Unless they want to convert to Roth IRAs there is no need to. And if they want the money in the Roth IRAs instead of TIRAs they could recharacterize instead of converting.
Basically, if I (MFJ) contribute 2x$5,500 to non-deductible traditional IRA for Year 2018 and earn less than $150,000 and convert the same to ROTH IRAs, can I show the backdoor ROTH IRA for income tax benefits for Yr 2018? and, If I can benefit from 2018 Income Tax, what is the work involved?
At $150K income for 2018, if you want money in Roth IRAs and haven't already contributed for 2018 yet, you can just contribute directly to the Roth IRAs. You don't need to use the backdoor method. You're allowed to, but not required to. At $150K a spouse with an employer plan won't be able to deduct and should contribute to a Roth IRA. A spouse without an employer plan will be able to deduct and will need to decide if deducting now is the best idea. It will depend on expected future income and the potential need to use the backdoor method.

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Sun Jan 14, 2018 6:10 pm

Duckie wrote:
dbk wrote: In this particular case you brought up, a MFJ at income of 100K but had already contributed to traditional IRA 2x$5,500, what is the work involved to claim tax benefit on 2x$5,500 after converting to ROTH IRAs? Just 8606 form? Anything else?
What exactly do you mean by "tax benefit"? Do you mean a taxable deduction? Because deductions are limited by income and employer plans. Here are the deduction income limits for 2017 and 2018.

In the above case on an income of $100K both spouses can take the full deduction even if they were both covered by employer plans. Unless they want to convert to Roth IRAs there is no need to. And if they want the money in the Roth IRAs instead of TIRAs they could recharacterize instead of converting.
Yes, I meant tax deduction. What do you mean by recharacterize?

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Duckie
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by Duckie » Sun Jan 14, 2018 8:52 pm

dbk wrote:What do you mean by recharacterize?
It's like a do-over. They contact their TIRA custodian and say they want the $5,500 TIRA contributions plus earnings "recharacterized" to Roth IRAs. It will be as if they contributed to the Roth IRAs in the first place. They'll have to add a statement saying what they did with their return but won't have to file Form 8606.

dbk
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by dbk » Mon Jan 15, 2018 1:00 pm

Thank you all. This link provided good information.
https://www.irs.gov/retirement-plans/tr ... -roth-iras

Alan S.
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by Alan S. » Mon Jan 15, 2018 7:22 pm

If your 2017 Modified AGI ends up in the Roth contribution phaseout range (186-196k) and you have gains on your investment, you would generally be better off to do a partial recharacterization to TIRA, leaving the amount you are allowed to contribute to Roth in the Roth IRA.

Otherwise, if you recharacterize the entire contribution, you will be sending ALL the earnings to a TIRA. For example, assume a 5500 contribution that is now worth 6000 and your MAGI is 50% through the phaseout range. With an allowed Roth contribution of 2750, half your gain of 500 stays in the Roth and 3000 is transferred to your TIRA. The 250 of earnings will be taxed when you convert to Roth.

Conversely, if you recharacterized the entire contribution, then 6000 would be transferred to your TIRA including all 500 of your gains, and those gains will eventually be taxed.

Of course, you can use judgement. You might have either a very small gain or you might be only 500 over the 186k phaseout threshold. In either case only a very small amount of gain would be transferred out of the Roth. You need to get the numbers to determine the most efficient action to take.

A tax program will tell you the allowed contribution after all your income is entered, or there is a worksheet in Pub 590 A to figure it yourself. And if your Roth holds only this contribution, your gain is simply the amount your account is now worth less your contribution. But if you contributed to an existing Roth IRA, then a complex formula is used to determine the amount of gain assigned to this particular contribution.

Katietsu
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Re: Invested in ROTH IRA but I appear to have crossed $186K mark

Post by Katietsu » Mon Jan 15, 2018 7:36 pm

I would not deal with 2018 right now. Yes, it might turn out to be a little better. But, when you are just starting to try to understand this stuff, it is not worth the hassle factor IMO. Get 2017 straight and do your first 8606.

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