Roth IRA - excess contribution

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Topic Author
ChiliH20
Posts: 20
Joined: Mon Aug 10, 2015 2:35 pm

Roth IRA - excess contribution

Post by ChiliH20 » Mon Feb 11, 2019 5:47 pm

Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.

megabad
Posts: 960
Joined: Fri Jun 01, 2018 4:00 pm

Re: Roth IRA - excess contribution

Post by megabad » Mon Feb 11, 2019 6:20 pm

ChiliH20 wrote:
Mon Feb 11, 2019 5:47 pm
Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.
Here is what I would do (prior to all tax deadlines) based on the limited info provided:
1) Roll your all your tIRAs (ie. Rollover IRA and all other) into your (or spouses) 401k --this will clear the path for backdoor Roth
2) Recharacterize your excess contribution to nondeductible tIRA prior to tax deadlines
3) Convert this contribution to Roth IRA

If the gain is small or negative. You could alternatively just withdraw the excess and pay the taxes and penalty on that small amount. Problem is, if your income stays this high, you will need to get rid of the tIRAs anyway to do backdoor Roth IRAs in the future, so I would prefer the steps above rather than withdrawal.

Any major custodian will perform these steps for you (ie. they would do the calculations in most cases). You would just fill out a form.

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Duckie
Posts: 6267
Joined: Thu Mar 08, 2007 2:55 pm

Re: Roth IRA - excess contribution

Post by Duckie » Mon Feb 11, 2019 7:23 pm

ChiliH20 wrote:I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified.
Contact your Roth IRA custodian and have them "recharacterize" your 2018 contribution plus earnings to a TIRA. When you file your 2018 taxes you tell your accountant / tax software you made a $1000 contribution to a Roth IRA, recharacterized $1000 to a TIRA (ignoring the earnings here), and that the TIRA contribution was non-deductible. That information will trigger both Form 8606 and the recharacterization statement (the earnings are noted on the statement). If you want you can still contribute the extra $4500 to the TIRA for 2018 before filing your taxes.
Also have company 401K if that works better.
Will your 401k take incoming rollovers? If it does (and has decent options) you can roll your Rollover IRA into the 401k. That will make the Backdoor Roth method practical. If you don't get rid of that Rollover IRA the backdoor method will be too costly because of the dreaded pro-rata rule.
Do I still have to pay a penalty to reclassify?
There is no penalty for recharacterizing.
I have to transfer any gains or dividends too, right?
Yes.
How do I calculate that?
The custodian figures that.

Topic Author
ChiliH20
Posts: 20
Joined: Mon Aug 10, 2015 2:35 pm

Re: Roth IRA - excess contribution

Post by ChiliH20 » Thu Feb 14, 2019 11:57 am

Thanks! This is all very helpful.

Might be stupid question, but I can recharacterize my Roth contribution to traditional IRA even if I am contributing to my work 401K, right? What if I maxed out my 401K contribution?

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Duckie
Posts: 6267
Joined: Thu Mar 08, 2007 2:55 pm

Re: Roth IRA - excess contribution

Post by Duckie » Thu Feb 14, 2019 3:39 pm

ChiliH20 wrote:I can recharacterize my Roth contribution to traditional IRA even if I am contributing to my work 401K, right? What if I maxed out my 401K contribution?
Yes and yes. Recharacterizations (and contributions and conversions) of your personal IRAs are not affected by what is happening in your employer plan.

gmc4h232
Posts: 238
Joined: Wed Jan 27, 2016 8:11 am

Re: Roth IRA - excess contribution

Post by gmc4h232 » Thu Feb 14, 2019 3:51 pm

megabad wrote:
Mon Feb 11, 2019 6:20 pm
ChiliH20 wrote:
Mon Feb 11, 2019 5:47 pm
Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.
Here is what I would do (prior to all tax deadlines) based on the limited info provided:
1) Roll your all your tIRAs (ie. Rollover IRA and all other) into your (or spouses) 401k --this will clear the path for backdoor Roth
2) Recharacterize your excess contribution to nondeductible tIRA prior to tax deadlines
3) Convert this contribution to Roth IRA

If the gain is small or negative. You could alternatively just withdraw the excess and pay the taxes and penalty on that small amount. Problem is, if your income stays this high, you will need to get rid of the tIRAs anyway to do backdoor Roth IRAs in the future, so I would prefer the steps above rather than withdrawal.

Any major custodian will perform these steps for you (ie. they would do the calculations in most cases). You would just fill out a form.
Consider opening solo 401k for the TIRAs if you can qualify for one to save on fees.

Topic Author
ChiliH20
Posts: 20
Joined: Mon Aug 10, 2015 2:35 pm

Re: Roth IRA - excess contribution

Post by ChiliH20 » Thu Feb 14, 2019 5:32 pm

"Consider opening solo 401k for the TIRAs if you can qualify for one to save on fees." - I don't know how to do the quote thing


another dumb question. How can I tell how much TD Ameritrade is charging me for my traditional IRAs. I have two traditional IRAs with them. One for me when I moved jobs, and another was opened for my wife when she moved jobs. We have one Roth IRA that is also with TD. Can I consolidate the two traditional IRAs to one, or do they have to be separate since we are two different people? We both have 401K at our current jobs. Would it be better to move the TD Ameritrade funds to our employer 401K?

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