Over income limits for IRA--roth convert?

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28fe6
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Joined: Wed Jan 03, 2018 9:01 am

Over income limits for IRA--roth convert?

Post by 28fe6 » Mon Feb 11, 2019 1:38 pm

For the first time, I am over the income limits for full IRA contribution. I'm not sure the best thing to do now.

I contributed $5500 to both my wife's and my IRA's in 2018 ($11,000 total), but Turbotax says that my wife can deduct the full $5500, but I can only deduct $200, since I'm covered by a workplace savings plan and my MAGI is about $120k. Therefore my deduction will only be $5700 and not the full $11,000.

Is there any way to reduce my 2018 MAGI at this point?

Assuming I can't reduce my MAGI, then Turbotax also makes me choose whether to convert part of my IRA contribution to "non-deductible". Whether I choose it or not, my refund amount does not seem to change. Should I choose the option to convert part of my IRA contribution to non-deductible? Or should I do a Roth conversion of $5300 from my IRA to a Roth IRA? I also have a Roth IRA, but I did not contribute to it in 2018.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Over income limits for IRA--roth convert?

Post by mhalley » Mon Feb 11, 2019 1:52 pm

I think that is too late to decrease your magi. The general consensus is that if you are not doing backdoor roths, it is better to just invest in taxable as the non deductable Ira can make the taxes complicated. A Roth conversion with money in tira is not good due to the pro rata rule.

https://www.kitces.com/blog/the-impact- ... -payments/

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Epsilon Delta
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Re: Over income limits for IRA--roth convert?

Post by Epsilon Delta » Mon Feb 11, 2019 2:06 pm

You should be looking at a Roth recharacterization, not a Roth conversion. These have specific meanings in the tax code.

If you are in the phaseout range for deducting an IRA you're income is usually low enough to make a direct Roth contribution. Recharacterizing the tIRA contribution to a Roth contribution ends up as if you'd contributed to a Roth in the first place.

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28fe6
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Joined: Wed Jan 03, 2018 9:01 am

Re: Over income limits for IRA--roth convert?

Post by 28fe6 » Mon Feb 11, 2019 2:09 pm

I definitely don't like the idea of part of my IRA being deferred and part of it not being deferred. So I would prefer not having nondeductible contributions in my regular IRA. That would be complicated.

I will talk to a Fidelity rep to see if they can recharacterize $5300 of my 2018 contribution as Roth. Then I will re-do my taxes in TurboTax accordinly, with only $200 of tIRA contributions and $5300 of Roth contributions for 2018.

Possibly relevant: My traditional IRA has only a ~$6k balance, because I only opened it in early 2018. I contributed $5500 in 2018, and $545 so far in 2019. So it turns out almost the entire balance of my tIRA is non-deductible at this point. Only $200 from 2018 and possibly the $545 I contributed so far in 2019 may be deductible (if my MAGI is lower for 2019).

Also possibly relevant: I usually prefer to split my contributions equally between myself and my wife's IRAs, as this is our agreed method. However, since my wife is eligible for full deduction, and I'm not, I guess I'm going to just give up on that. I could recharacterize an equal amount of my wife's IRA (and pay taxes on it) to be "fair", but there's no compelling reason to do so otherwise (I prefer tax deferral to Roth in general).

mhalley
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Re: Over income limits for IRA--roth convert?

Post by mhalley » Tue Feb 12, 2019 1:51 pm

If you only have a small amount in trad Ira, Then convert it all to Roth and do backdoor going forward. You don’t want to recharacterize, you want to convert.

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Epsilon Delta
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Re: Over income limits for IRA--roth convert?

Post by Epsilon Delta » Tue Feb 12, 2019 2:49 pm

mhalley wrote:
Tue Feb 12, 2019 1:51 pm
If you only have a small amount in trad Ira, Then convert it all to Roth and do backdoor going forward. You don’t want to recharacterize, you want to convert.
You are confusing the issue.

With income in the phaseout range for IRA deductions he is eligible for direct Roth IRA contribution. The backdoor Roth is an unnecessary complication at this income level.

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