When you exceed the Roth Income Limits - Options?

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PhillyPhan
Posts: 33
Joined: Wed Nov 28, 2012 9:35 am

When you exceed the Roth Income Limits - Options?

Post by PhillyPhan » Fri Jan 11, 2019 9:59 am

I funded my 5,500 in early January 2018 expecting to have an AGI below the Roth IRA limits however due to some unexpected bonuses, AGI will be above the allowable limits.

Seeking suggestions on options and timing on when I would need to take action to avoid any issues.

Also, I have a rollover IRA which I believe would limit my ability to perform a backdoor roth. I believe I would need to rollover the IRA into a 401k plan. If anyone has information on this I would appreciate it.

Jack FFR1846
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Re: When you exceed the Roth Income Limits - Options?

Post by Jack FFR1846 » Fri Jan 11, 2019 10:07 am

This happened to me last year. We received the numbers that we could contribute to each Roth and provided them to Fidelity and Schwab (where each of our $6500 Roths were funded). With each, we submitted "withdrawal of excess contribution" forms and spoke with both providers on the phone. Some weeks later, checks arrived.

For 2018, I have made no contributions, awaiting the magic number from our mystical tax preparer.

We're in the same boat you describe with large tIRAs (2 commas) and a 401k that is not adequate to buy all the legs of a low cost, 3 fund portfolio. So no backdoor for us.
Bogle: Smart Beta is stupid

transient_academic
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Re: When you exceed the Roth Income Limits - Options?

Post by transient_academic » Fri Jan 11, 2019 10:50 am

I can't speak to any part of finding yourself above the Roth limits with contributions made.

I did have a traditional IRA that I rolled to a 401k. Unfortunately it depends on the 401k plan so that I was able to do it won't really help you. My 401k was with Fidelity and if yours is then you probably have a good chance of being able to do it.

If you find out you can't roll it in to your 401k, there is at least one laborious workaround - if you can generate some self-employment income then it would be possible to set up a solo 401k. Those you can set up so you can roll a traditional IRA into them, which should make it possible to avoid pro-rating on any Roth conversions you want to do. There are other ways, but that was the one I circled as most achievable in the event I couldn't roll my tIRA to my 401k.

Edit:
Yes, your rollover tIRA will almost certainly generate pro-rated taxable "income" should you attempt a Roth conversion. There are a few ways to move the tIRA to a non-IRA space so the funds won't be counted against you (most of them roll it over to a 401k or other non-IRA retirement plan like the two options I mention above). If those options seem like too much work for the tax savings then it might be worth eating the tax hit now and converting it all so you won't have to deal with it any more.

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grabiner
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Re: When you exceed the Roth Income Limits - Options?

Post by grabiner » Fri Jan 11, 2019 10:18 pm

PhillyPhan wrote:
Fri Jan 11, 2019 9:59 am
I funded my 5,500 in early January 2018 expecting to have an AGI below the Roth IRA limits however due to some unexpected bonuses, AGI will be above the allowable limits.

Seeking suggestions on options and timing on when I would need to take action to avoid any issues.
You must recharacterize your Roth IRA contribution as a traditional IRA contribution; you can legally do this until October 15, but it's best to do before you file your taxes.

If you are covered by a retirement plan at work, your traditional IRA contribution will be non-deductible, but you are still allowed to make one regardless of your income.
Also, I have a rollover IRA which I believe would limit my ability to perform a backdoor roth. I believe I would need to rollover the IRA into a 401k plan. If anyone has information on this I would appreciate it.
You are correct here. The non-deductible amount will stay around (reported on Form 8606) until you convert it, but if you have a rollover IRA as well, you can't just convert the non-deductible amount; any conversion will be prorated between the deductible and non-deductible amounts. If you have a 401(k) which accepts rollovers from IRAs, you can roll in only the deductible amount, then convert the non-deductible amount to a Roth.
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MotoTrojan
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Re: When you exceed the Roth Income Limits - Options?

Post by MotoTrojan » Sat Jan 12, 2019 1:34 am

Can you roll your IRA into your 401K (and do you like the fund choices there enough to want to)? If so, recharacterizing then converting as you suggested is the best option. Given the recent market performance you’ll probably get away with minimal/no tax too.

Admiral
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Re: When you exceed the Roth Income Limits - Options?

Post by Admiral » Sat Jan 12, 2019 8:21 am

I rolled a SEP IRA into my employer's 403b, which allowed me to do backdoor conversions. You can check with your employer plan provider (mine is Vanguard) to see if they will accept a rollover.

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