I think I messed up my taxes.

[icbmwapg41]

I buy a Roth IRA every year. But 2024 year was the first year that I converted some traditional 403b to Roth 403b so that I won't have too much taxable when RMD time comes.

But something just occurred to me. There are limits on your income for you to be able to buy a Roth IRA. It's about 150 K and the income from my job puts me below that. But if you include the amount I converted from traditional 403b to Roth 403b, it puts me above 150 K.

I did send the tax on that 403b conversion to the IRS, so that's fine. But I just now realized that the converted traditional 403b income puts me above 150 K, assuming that counts, which is probably does.

So if I'm correct, I bought a Roth IRA in 2024 but it turns out I was not allowed because my income ended up above 150 K due to the 403b conversion.

What sayeth you, All Knowing Board? I hope I didn't mess up too badly and that the IRS isn't going to put me in IRS jail. I hate how complicated that tax stuff is.

[mhalley]

Roth conversions don’t affect contribution limits as they don’t count in the magi calculation.
From investopedia:

Your gross income includes everything you earned during the year from:

Alimony, which is court-ordered payments to a spouse due to divorce or separation
Business income
Capital gains or any realized gains after selling an asset for a profit
Dividends, which are typically cash payments to a company’s shareholders
Interest
Farm income
Rental and royalty income
Retirement income
Tips
Wages
From irs.gov

[MAGI for Roth IRA contributions

Take your AGI and:

Add traditional IRA deductions - Schedule 1 (Form 1040), line 20
Subtract income from converting an IRA (other than a Roth IRA) to a Roth IRA - Form 1040 or 1040-SR, line 4b
Subtract rollovers from a qualified retirement plan to a Roth IRA - Form 1040 or 1040-SR, line 5b)/quote]

[icbmwapg41]

Roth conversions don’t affect contribution limits as they don’t count in the magi calculation.
From investopedia:

Your gross income includes everything you earned during the year from:

Alimony, which is court-ordered payments to a spouse due to divorce or separation
Business income
Capital gains or any realized gains after selling an asset for a profit
Dividends, which are typically cash payments to a company’s shareholders
Interest
Farm income
Rental and royalty income
Retirement income
Tips
Wages
From irs.gov

[MAGI for Roth IRA contributions

Take your AGI and:

Add traditional IRA deductions - Schedule 1 (Form 1040), line 20
Subtract income from converting an IRA (other than a Roth IRA) to a Roth IRA - Form 1040 or 1040-SR, line 4b
Subtract rollovers from a qualified retirement plan to a Roth IRA - Form 1040 or 1040-SR, line 5b)/quote]

Big sigh of relief! And not just because of whatever penalty I'd have had to pay but also because it stresses me to get involved in legalities and the authorities and such.

Thanks for the info and I'm very happy that I can move on without worry.

[ClaycordJCA]

This topic is now in the Personal Finance (Not Investing) forum (taxes).

[HomeStretch]

Roth conversions don’t affect contribution limits as they don’t count in the magi calculation.

Big sigh of relief! And not just because of whatever penalty I'd have had to pay but also because it stresses me to get involved in legalities and the authorities and such.

Thanks for the info and I'm very happy that I can move on without worry.

Roth conversions from TIRA to Roth IRA are excluded from the IRA contribution MAGI. But your Roth conversion was from traditional 403b to Roth 403b which is not excluded from MAGI.

For the calculation of MAGI, see Worksheet 2-1 on p. 40 of IRS publication 590-A:
https://www.irs.gov/pub/irs-pdf/p590a.pdf

[mhalley]

I did not realize 403b were included. Sorry for any wrong information.

[toddthebod]

The easiest solution is to request a return of excess contributions with your IRA custodian.

A more involved possibility would be to make a backdoor Roth contribution. This would involve recharacterizing your contribution to a traditional IRA contribution and immediately converting it. You'd have to file form 8606 with your taxes for 2024 and 2025. And it doesn't really work if you already have any pre-tax IRA balances.

[neurosphere]

I have a related question I've always wondered about, slightly related to the OPs issue, but for which I can't find confirmation.

Can one make a Traditional IRA contribution, ask to have the funds returned, and then later make another IRA contribution?

E.g. $7000 to the IRA, then taken out. Then later another $7000 contribution? Whether to the original IRA, or a different one (i.e. Roth vs Traditional). Obviously a recharacterization is essentially just a distribution from Roth with fund put in a Traditional (or vice versa). But outside of the recharacterization process, can one request an "excess" be returned, but then replace those same funds later if it turns out they were still eligible and there was no excess that needed to be returned?

[toddthebod]

I have a related question I've always wondered about, slightly related to the OPs issue, but for which I can't find confirmation.

Can one make a Traditional IRA contribution, ask to have the funds returned, and then later make another IRA contribution?

E.g. $7000 to the IRA, then taken out. Then later another $7000 contribution? Whether to the original IRA, or a different one (i.e. Roth vs Traditional). Obviously a recharacterization is essentially just a distribution from Roth with fund put in a Traditional (or vice versa). But outside of the recharacterization process, can one request an "excess" be returned, but then replace those same funds later if it turns out they were still eligible and there was no excess that needed to be returned?

Sure. A single custodian will likely not permit it, however. You'll need to make your new contribution at a different custodian. E.g., if you make the original contribution and request the return of excess from Custodian A, then Custodian A may not allow you to make an additional contribution that year. However, you are free to make a contribution at Custodian B.

[neurosphere]

I have a related question I've always wondered about, slightly related to the OPs issue, but for which I can't find confirmation.

Can one make a Traditional IRA contribution, ask to have the funds returned, and then later make another IRA contribution?

E.g. $7000 to the IRA, then taken out. Then later another $7000 contribution? Whether to the original IRA, or a different one (i.e. Roth vs Traditional). Obviously a recharacterization is essentially just a distribution from Roth with fund put in a Traditional (or vice versa). But outside of the recharacterization process, can one request an "excess" be returned, but then replace those same funds later if it turns out they were still eligible and there was no excess that needed to be returned?

Sure. A single custodian will likely not permit it, however. You'll need to make your new contribution at a different custodian. E.g., if you make the original contribution and request the return of excess from Custodian A, then Custodian A may not allow you to make an additional contribution that year. However, you are free to make a contribution at Custodian B.

That makes sense, thanks. I spent a good bit of time trying to find explicit language that this was an ok thing to do in the eyes of the IRS. So, allowable, but administratively hindered. Otherwise, firms would have to track all the in-out-in-outs from IRAs within a tax year along with associated earnings/etc.

[toddthebod]

Sure. A single custodian will likely not permit it, however. You'll need to make your new contribution at a different custodian. E.g., if you make the original contribution and request the return of excess from Custodian A, then Custodian A may not allow you to make an additional contribution that year. However, you are free to make a contribution at Custodian B.

That makes sense, thanks. I spent a good bit of time trying to find explicit language that this was an ok thing to do in the eyes of the IRS. So, allowable, but administratively hindered. Otherwise, firms would have to track all the in-out-in-outs from IRAs within a tax year along with associated earnings/etc.

26 USC 408:

(4)Contributions returned before due date of return
Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if—
(A)such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year,
(B)no deduction is allowed under section 219 with respect to such contribution, and
(C)such distribution is accompanied by the amount of net income attributable to such contribution.
In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.

(5)Distributions of excess contributions after due date for taxable year and certain excess rollover contributions
(A)In general
In the case of any individual, if the aggregate contributions (other than rollover contributions) paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under section 219(b)(1)(A), paragraph (1) shall not apply to the distribution of any such contribution to the extent that such contribution exceeds the amount allowable as a deduction under section 219 for the taxable year for which the contribution was paid—
(i)if such distribution is received after the date described in paragraph (4),
(ii)but only to the extent that no deduction has been allowed under section 219 with respect to such excess contribution.

We are always talking about (5), but in your case, I think (4) is relevant. I just don't know of any brokers who have a mechanism to return contributions that are not "excess". It is clearly permissible to have contributions returned whether or not they are excess.

[HomeStretch]

… So, allowable, but administratively hindered….

“administratively hindered” to make a 2nd online IRA contribution (after the return of the first contribution) because the website (at least at Fidelity) will block you from making the 2nd contribution because the website IRA contribution tracker doesn’t get adjusted for the return of the 1st IRA contribution. As suggested, you can open an IRA at another brokerage if you want to do this online. But if you don’t want to open an account at a 2nd brokerage, you can make the second IRA contribution (at least at Fidelity) if you use a contribution form uploaded online or at a Fidelity Center.

[grok87]

Big sigh of relief! And not just because of whatever penalty I'd have had to pay but also because it stresses me to get involved in legalities and the authorities and such.

Thanks for the info and I'm very happy that I can move on without worry.

Roth conversions from TIRA to Roth IRA are excluded from the IRA contribution MAGI. But your Roth conversion was from traditional 403b to Roth 403b which is not excluded from MAGI.

For the calculation of MAGI, see Worksheet 2-1 on p. 40 of IRS publication 590-A:
https://www.irs.gov/pub/irs-pdf/p590a.pdf

thanks. I'm trying to work through these forms for some tax planning. Would be grateful if you can confirm my understanding is correct:

MAGI for Roth IRA purposes...
1) Starts with 1040 AGI (line 11)
2) then Excludes Traditional IRA to Roth IRA conversion income
3) then adds back Traditional IRA contribution deduction
4) then adds back any excludable savings bond interest

[note i've simplified by ignoring a few things that i think are rare for most people- foreign housing etc.]

thanks
grok87

[toddthebod]

Roth conversions from TIRA to Roth IRA are excluded from the IRA contribution MAGI. But your Roth conversion was from traditional 403b to Roth 403b which is not excluded from MAGI.

For the calculation of MAGI, see Worksheet 2-1 on p. 40 of IRS publication 590-A:
https://www.irs.gov/pub/irs-pdf/p590a.pdf

thanks. I'm trying to work through these forms for some tax planning. Would be grateful if you can confirm my understanding is correct:

MAGI for Roth IRA purposes...
1) Starts with 1040 AGI (line 11)
2) then Excludes Traditional IRA to Roth IRA conversion income
3) then adds back Traditional IRA contribution deduction
4) then adds back any excludable savings bond interest

[note i've simplified by ignoring a few things that i think are rare for most people- foreign housing etc.]

thanks
grok87

Looks right. I did just notice something funny about that worksheet though: Both the student loan interest deduction and the savings bond interest exclusion have much lower MAGI limits than Roth IRA contributions, and similar adjustments are made to those MAGI calculations. I am unable to think of a situation where you would be eligible for either of those deductions but not eligible to contribute to a Roth IRA.

[grok87]

thanks. I'm trying to work through these forms for some tax planning. Would be grateful if you can confirm my understanding is correct:

MAGI for Roth IRA purposes...
1) Starts with 1040 AGI (line 11)
2) then Excludes Traditional IRA to Roth IRA conversion income
3) then adds back Traditional IRA contribution deduction
4) then adds back any excludable savings bond interest

[note i've simplified by ignoring a few things that i think are rare for most people- foreign housing etc.]

thanks
grok87

Looks right. I did just notice something funny about that worksheet though: Both the student loan interest deduction and the savings bond interest exclusion have much lower MAGI limits than Roth IRA contributions, and similar adjustments are made to those MAGI calculations. I am unable to think of a situation where you would be eligible for either of those deductions but not eligible to contribute to a Roth IRA.

thanks. that's actually the point i am interested in -savings bond interest exclusion. Hypothetically, if one's income was low enough for the savings bond interest exclusion, and then one cashed a large amount of savings bonds to move the funds into say a 529 plan, it looks like that could push your MAGI for Roth IRA purposes above the limit. Does that make sense?

[toddthebod]

Looks right. I did just notice something funny about that worksheet though: Both the student loan interest deduction and the savings bond interest exclusion have much lower MAGI limits than Roth IRA contributions, and similar adjustments are made to those MAGI calculations. I am unable to think of a situation where you would be eligible for either of those deductions but not eligible to contribute to a Roth IRA.

thanks. that's actually the point i am interested in -savings bond interest exclusion. Hypothetically, if one's income was low enough for the savings bond interest exclusion, and then one cashed a large amount of savings bonds to move the funds into say a 529 plan, it looks like that could push your MAGI for Roth IRA purposes above the limit. Does that make sense?

I don't see how that would work. The savings bond interest is included in the MAGI calculation for the savings bond exclusion. You can't start at $200,000, exclude $100,000 of interest, then say your MAGI is low enough to qualify to exclude that $100,000.

The MAGI calculation for savings bond interest exclusion is as follows:
1. Start with all interest (including savings bonds interest) from Schedule B before the exclusion.
2. Add the rest of the income items from form 1040 (lines 1, 3, 4, etc.)
3. Subtract out most of the adjustments from Schedule 1, part 2.

[grok87]

thanks. that's actually the point i am interested in -savings bond interest exclusion. Hypothetically, if one's income was low enough for the savings bond interest exclusion, and then one cashed a large amount of savings bonds to move the funds into say a 529 plan, it looks like that could push your MAGI for Roth IRA purposes above the limit. Does that make sense?

I don't see how that would work. The savings bond interest is included in the MAGI calculation for the savings bond exclusion. You can't start at $200,000, exclude $100,000 of interest, then say your MAGI is low enough to qualify to exclude that $100,000.

The MAGI calculation for savings bond interest exclusion is as follows:
1. Start with all interest (including savings bonds interest) from Schedule B before the exclusion.
2. Add the rest of the income items from form 1040 (lines 1, 3, 4, etc.)
3. Subtract out most of the adjustments from Schedule 1, part 2.

ah i see, thanks