Whither Excess Roth Contributions? (taxable account vs non-deductible tIRA)

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Whither Excess Roth Contributions? (taxable account vs non-deductible tIRA)

Post by Todd8D » Tue Oct 09, 2018 3:47 pm

I need to decide what to do with excess contributions made in 2017 to our Roth IRAs. We are in our late 30s, and our 2017 income ended up in the phase out range for Roth contributions. My wife participated in the 401k plan provided by her employer, so I am able to recharacterize some of my contributions as deductible IRA contributions, but she cannot. This leaves us both with excess Roth contributions (as in potentially $7k too much).

Here are the two options I’m considering for our excess Roth contributions:
  • Withdrawing the excess contributions (plus earnings) and putting them in a taxable account.
  • Recharacterizing the excess contributions as non-deductible tIRA contributions.
(We do not have the option of leaving the excess contributions, paying the 6% penalty, and under-contributing for 2018 because our income won’t allow us to contribute to Roth IRAs in 2018.)

Is there another option I’m missing?

Which would you recommend?

The Bogleheads prioritizing investments wiki suggests that contributing to a taxable account is generally preferable to making non-deductible tIRA contributions. However, in this case choosing the taxable account also reduces the amount I can contribute to (1) my deductible IRA, (2) my Roth, and (3) my wife's Roth.

Pros of moving to the taxable account
We don’t have to sort out the non-taxable basis in our tIRAs for the rest of our lives.
We now have a chunk of money to invest elsewhere.

The drawback is that we have to pay taxes on the earnings from 2017 (and these 2017 earnings also reduce the amount we can contribute to our Roths and the deductible contributions I can make to my tIRA).

Pros of recharacterizing to non-deductible contributions
Greater contributions to our Roths this year
Greater deductible contribution to my tIRA
We don’t have to pay any taxes on the re-characterized gains this year.

Most of the proponents of non-deductible tIRA contributions mention the possibility of a backdoor Roth. Because we both have tIRAs funded entirely with deductible contributions the backdoor Roth does not appear feasible (I don't have any good options for moving the deductible contributions to a non-IRA).

Here are the specific contribution numbers I'm looking at:

Taxable Account Option
My deductible tIRA: $1300
My non-deductible tIRA: 0
My Roth: $1300
Wife tIRA: 0
Wife Roth: $1300
Taxable Account: $7100 (+ earnings - taxes on earnings= ~$7800)

Non-deductible tIRA Option
My deductible tIRA: $2080
My non-deductible tIRA: $1340
My Roth: $2080
Wife tIRA: $0
Wife Roth: $2080
Wife non-deductible tIRA: $3420
Taxable Account: $0

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Re: Whither Excess Roth Contributions? (taxable account vs non-deductible tIRA)

Post by PFInterest » Mon Oct 22, 2018 10:03 pm

you should spend a lot of time reading about the backdoor rIRA.
itll clear up a lot of items.

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Joined: Tue Nov 20, 2007 6:02 am

Re: Whither Excess Roth Contributions? (taxable account vs non-deductible tIRA)

Post by mhalley » Tue Oct 23, 2018 3:25 am

It doesn't take much in the way of earnings to allow for the establishment if a solo 401k. A little eBay selling, a few Uber trips and you can roll the trad ira over. Keeping track of nondeductable IRA is a hassle, so if you elect to forgo the solo 401k I would just withdraw the excess.

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