Fixing Roth IRA contribution over income limit

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
airborne
Posts: 37
Joined: Mon Jan 15, 2018 12:04 pm

Fixing Roth IRA contribution over income limit

Post by airborne » Wed May 16, 2018 7:07 pm

This falls into the category of good problems to have, but it's still a problem.

I lump sum my Roth IRA contributions in January and did so this year with the full expectation of coming in well below the income limit. It now appears I'll be over the $120k threshold (filing single). All of the resources I've found have indicated I should recharacterize my contributions as "traditional" IRA contributions, after which I'd want to "backdoor" back to Roth. However, all of the articles I've read are from pre-tax reform, and I thought I recall reading somewhere that recharacterizations are more complicated under the revised tax code.

Am I missing something? I'd like to tackle this earlier in the year rather than later in order to minimize costs, assuming the value of my IRA continues upward. Ideal outcome is getting the $5500+gains back into a Roth vehicle. Increasing my 401(k) contribution in order to reduce my AGI is not an option as I am using all excess cash flow to pay down student loans. I wish I had done a backdoor Roth to start out the year. (Let that be a lesson to anyone who is anywhere near the income threshold and has a slight chance of getting a big raise during the year!)

What's the best way to rectify this situation?

Alan S.
Posts: 7497
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Fixing Roth IRA contribution over income limit

Post by Alan S. » Wed May 16, 2018 7:19 pm

Recharacterizations are not more complicated than before. Here is what changed:

1) Recharacterization of conversions have simply been eliminated
2) Recharacterizations of regular contributions to a different type of IRA account remain unchanged.

The key to the back door Roth is not having any pre tax IRA accounts because if you do then taxes will be due when you convert. If you do NOT have any pre tax non Roth IRA value, then you can simply recharacterize your Roth contribution as a TIRA contribution and convert immediately after the recharacterization. You will only pay taxes on gains generated between the date of your Roth contribution and the date of your conversion, and you will not have to worry about exactly where your modified AGI ends up.

If you DO have any pre tax IRA values, please advise since this issue can often be resolved by rolling those values into a current employer plan that accepts IRA rollovers.

airborne
Posts: 37
Joined: Mon Jan 15, 2018 12:04 pm

Re: Fixing Roth IRA contribution over income limit

Post by airborne » Wed May 16, 2018 7:32 pm

Thanks for clarifying that for me. I have zero pre-tax IRA values, so it sounds like this should be fairly straightforward. Not sure why I thought it was more complicated than before.

Many thanks.

togb
Posts: 53
Joined: Mon Oct 23, 2017 8:36 pm

Re: Fixing Roth IRA contribution over income limit

Post by togb » Wed May 16, 2018 10:48 pm

Ramp up your charitable donations to manage your income down to where it needs to be?

Alan S.
Posts: 7497
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Fixing Roth IRA contribution over income limit

Post by Alan S. » Wed May 16, 2018 10:54 pm

togb wrote:
Wed May 16, 2018 10:48 pm
Ramp up your charitable donations to manage your income down to where it needs to be?

This will not reduce modified AGI for regular Roth contribution purposes, it will only reduce taxable income. However, if you are over 70.5 a QCD WILL reduce your modified AGI by keeping all or part of your TIRA distributions (RMD or otherwise) out of modified AGI.

Post Reply