How do you report reduced ROTH contribution?

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Gamma Ray
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How do you report reduced ROTH contribution?

Post by Gamma Ray »

We contributed full $5500 for myself and my wife each this year, and there might be a potential year-end bonus that might push us over 193k ROTH limit.

Since we contributed regularly and we don't know if we will go over or not until we file our taxes, how do you manage the reduced contribution for 2019 when you file your taxes in March of 2020?

Do you just tell them and pay the add'l taxes for the amount you contributed up front so that you can still contribute or do you have to withdraw the over contribution and balance it?
Like if your AGI is over $203,000, do you have to take back everything you contributed?
What happens to the earnings/growth?

*Sorry if I posted this in wrong section, maybe this belongs in Personal Investments.
HomeStretch
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Re: How do you report reduced ROTH contribution?

Post by HomeStretch »

If you and spouse are not eligible to make 2019 Roth IRA contributions, you would need to request that the IRA custodian recharacterize the contribution by your tax filing deadline (including extensions) in 2020.

Link to IRS FAQ:
https://www.irs.gov/retirement-plans/ir ... tributions
kaneohe
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Re: How do you report reduced ROTH contribution?

Post by kaneohe »

HomeStretch wrote: Sun Dec 08, 2019 11:44 pm If you and spouse are not eligible to make 2019 Roth IRA contributions, you would need to request that the IRA custodian recharacterize the contribution by your tax filing deadline (including extensions) in 2020.

Link to IRS FAQ:
https://www.irs.gov/retirement-plans/ir ... tributions
If you recharacterize your contribution from Roth to TIRA, your earnings/growth become part of your TIRA.

If you withdraw your Roth contributions (as well as associated earning/growth), the associated earnings/growth that are withdrawn are taxed and also subject to the early withdrawal penalty.
HomeStretch
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Re: How do you report reduced ROTH contribution?

Post by HomeStretch »

If you choose to recharacterize to a tIRA, you can then convert to a Roth IRA (step 2 of the backdoor Roth). You will pay taxes on any pretax earnings you convert (or first roll them over into another retirement plan). If you have any other pretax IRAs, the Roth conversion is subject to the pro rata rule.
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firebirdparts
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Re: How do you report reduced ROTH contribution?

Post by firebirdparts »

I did this last year also, but I was "lucky" enough that my income dropped this year, so I can pay the penalty on it once and then bring it in out of the rain this year. That goes on form 5329 I think, if you just pay the penalty on it. If I understand it correctly, you would have to pay the penalty on it every year forever if you don't resolve it using one of the above methods.

This year, I am going to do my taxes before contributing, but of course you do miss a year in the market doing that.
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Gamma Ray
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Re: How do you report reduced ROTH contribution?

Post by Gamma Ray »

kaneohe wrote: Mon Dec 09, 2019 9:52 am
HomeStretch wrote: Sun Dec 08, 2019 11:44 pm If you and spouse are not eligible to make 2019 Roth IRA contributions, you would need to request that the IRA custodian recharacterize the contribution by your tax filing deadline (including extensions) in 2020.

Link to IRS FAQ:
https://www.irs.gov/retirement-plans/ir ... tributions
If you recharacterize your contribution from Roth to TIRA, your earnings/growth become part of your TIRA.

If you withdraw your Roth contributions (as well as associated earning/growth), the associated earnings/growth that are withdrawn are taxed and also subject to the early withdrawal penalty.
I already have a SIMPLE IRA that I've been contributing through my employer, if I remember correctly, that does not impact my eligibility of Traditional or ROTH, is that correct?

So, if I am over the high limit then I can just tell VG to move all my 2019 contributions as well as earnings to Traditional IRA, then it would be non-deductible Traditional IRA, right? I would just pay taxes on it whenever I am retiring and start withdrawing.

The other complication in my case is we also contribute for my stay-at-home wife, and if we re characterize her $5500 into Traditional IRA, and at first I thought we can deduct hers since she falls into Non-active participant spouse, but I noticed that because I have SIMPLE IRA, It doesn't look like her contribution could be deducted either.

In either case, the contribution limit to tIRA is $6000, for 2019, what happens to the earnings on that $6000? Or there is no limit in Traditional IRA? Sorry, I might be confusing things.

firebirdparts wrote: Mon Dec 09, 2019 10:06 am I did this last year also, but I was "lucky" enough that my income dropped this year, so I can pay the penalty on it once and then bring it in out of the rain this year. That goes on form 5329 I think, if you just pay the penalty on it. If I understand it correctly, you would have to pay the penalty on it every year forever if you don't resolve it using one of the above methods.

This year, I am going to do my taxes before contributing, but of course you do miss a year in the market doing that.
Yes, that's what it sounds like, you would need to pay penalty every year 6% or so, I really don't want to go into that, if necessary I'd just withdraw whatever is necessary to avoid penalties and pay taxes if needed.

I hear you about waiting to do taxes before contributing, although contributing every month vs one lump sum is always smarter financially.
Also with complicated taxes, you will never know your AGI in advance, you will only know about it after you prepare your taxes, so that would mean you need to do a draft, see if you are over the limit, go back to VG and tell them to make changes, then take tax papers, and bring it back to CPA to re-draft the tax returns? That's a lot of hassle.
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