2nd Year of Exceeding MAGI for Roth - Questions

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Topic Author
Shaken_not_Stirred
Posts: 6
Joined: Thu Jan 20, 2022 11:53 am

2nd Year of Exceeding MAGI for Roth - Questions

Post by Shaken_not_Stirred »

Hello Boglehead Community!

As I run through my tax prep software this year, it appears that this year for the 2nd year in a row my wife and I (MFJ) will exceed the MAGI (214k?) allowed to contribute to Roth IRAs, although this year it looks like we will be only ~$2k over the limit. I will submit that I am only just past the point of entering all income and taxes paid - not much further past that point in TurboTax.

We both are 50+ and have contributed the max amount to our Roth IRAs (Vanguard) for quite some time. Last year we had to re-characterize the Roth's to tIRAs w/ Vanguard, and did nothing else - those amounts still sit in those accounts. This year it looks like we will have to do the same, and wondering about the prospect of a Backdoor Roth for both of us.

Regarding methods to potentially reduce our MAGI, I already max out my 401k w/ plus-up at work, and I can't contribute to an HSA (military retiree), and not sure what else might have worked for us that would reduce our MAGI for the purposes of Roth contributions.

Questions:

1 - Regarding being within $2k of MAGI - any strategies that may be able to reduce that number below threshold that I am missing?

2 - Backdoor Roth (or other) options now that calendar year 2022 has passed, and how to best manage last year's and this year's re-characterization to tIRAs? I understand that executing the steps for a backdoor Roth are best done in the tax calendar year, so I know next steps are complex, but doable.

Any thoughts on these are greatly appreciated! Thanks in advance.
mhalley
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Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by mhalley »

Kiplinger has an article on reducing magi here
https://www.kiplinger.com/article/retir ... tions.html
But I think you are already doing most of them.
So now just proceed with backdoor Roth, ie recharacterize to tira, convert to Roth and fill out 8606. No harm in going ahead with bd going forward if you are iffy about whether you will be over the limit.
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FiveK
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Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by FiveK »

Shaken_not_Stirred wrote: Mon Jan 23, 2023 9:37 pm ...the steps for a backdoor Roth are...doable.
Yes, very much so, especially if you do draft forms 8606 for each of you before starting the process. You have actually started the process with last year's (I'm assuming 2021 tax year) non-deductible contribution - did you file forms 8606 for each of you for that?
tashnewbie
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Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by tashnewbie »

I agree that backdoor Roth is doable, but there are a few things that folks should be aware of so that they don't mess things up.

(1) Sounds like you re-characterized 2021 contributions in 2022 calendar year, before you filed your 2021 tax return?
(2) If that's true, did you each complete Form 8606 Part 1 to document your non-deductible TIRA contributions?
(3) If not, then you will need to complete those and send them to the IRS. I think these are standalone forms that the IRS will accept by themselves.
(4) Do you or your spouse have any pretax money in IRAs (Traditional, Rollover, SEP, SIMPLE)? This is different from the non-deductible/re-characterized money you put in the TIRAs for 2021 tax year.
(5) If either of you does have pretax money in TIRAs, then the backdoor wouldn't be advisable for that person unless and until they can get the pretax money into a 401k/403b/etc. or convert that pretax money to Roth (and pay associated taxes). The latter may not be desired, depending on the size of the pretax balance.
(6) If you don't have any pretax money in TIRAs, then the backdoor would be straightforward and easy.

Definitely review the backdoor Roth wiki page and ensure you understand the steps and the associated tax paperwork (Form 8606) BEFORE you attempt to execute the backdoor. Search the forum for related threads and ask questions if you have them.
Topic Author
Shaken_not_Stirred
Posts: 6
Joined: Thu Jan 20, 2022 11:53 am

Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by Shaken_not_Stirred »

Thanks all - and @tashnewbie - messing up is what I am trying to avoid, so thank you.
tashnewbie wrote: Tue Jan 24, 2023 9:23 am I agree that backdoor Roth is doable, but there are a few things that folks should be aware of so that they don't mess things up.

(1) Sounds like you re-characterized 2021 contributions in 2022 calendar year, before you filed your 2021 tax return?
Correct.

(2) If that's true, did you each complete Form 8606 Part 1 to document your non-deductible TIRA contributions?
Yes, in last year's return we both completed Form 8606, each showing $7k in lines 1, 3, & 14

(3) If not, then you will need to complete those and send them to the IRS. I think these are standalone forms that the IRS will accept by themselves.
Ok, since we filed 8606s last year, we will do the same this year?

(4) Do you or your spouse have any pretax money in IRAs (Traditional, Rollover, SEP, SIMPLE)? This is different from the non-deductible/re-characterized money you put in the TIRAs for 2021 tax year.
Yes, My spouse has ~ $94k in a rollover IRA from many years ago, I believe from her 401k. I think this will be the major pain point in any backdoor decision making.

(5) If either of you does have pretax money in TIRAs, then the backdoor wouldn't be advisable for that person unless and until they can get the pretax money into a 401k/403b/etc. or convert that pretax money to Roth (and pay associated taxes). The latter may not be desired, depending on the size of the pretax balance.
I see your point. How do I estimate the tax for the $94k rollover with a MAGI of $214k? I also have about ~$100k in my TSP - not sure how that factors in.

(6) If you don't have any pretax money in TIRAs, then the backdoor would be straightforward and easy.
And of course, it appears that straightforward and easy won't be my path forward. I do appreciate these insights. Her Rollover is about 15% of total retirement portfolio.

Definitely review the backdoor Roth wiki page and ensure you understand the steps and the associated tax paperwork (Form 8606) BEFORE you attempt to execute the backdoor. Search the forum for related threads and ask questions if you have them.
I will continue to research the backdoor process along with considering the tax implications of using the bd on her rollover IRA. Many thanks to all.
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by tashnewbie »

Shaken_not_Stirred wrote: Tue Jan 24, 2023 10:26 am Thanks all - and @tashnewbie - messing up is what I am trying to avoid, so thank you.
Happy to help as much as I can.
tashnewbie wrote: Tue Jan 24, 2023 9:23 am (2) If that's true, did you each complete Form 8606 Part 1 to document your non-deductible TIRA contributions?
Yes, in last year's return we both completed Form 8606, each showing $7k in lines 1, 3, & 14

(3) If not, then you will need to complete those and send them to the IRS. I think these are standalone forms that the IRS will accept by themselves.
Ok, since we filed 8606s last year, we will do the same this year?
Awesome. There's nothing you need to do at this point for the 2021 tax year. Depending on what you did in 2022, you'll just need to document things on your 2022 tax return.
(4) Do you or your spouse have any pretax money in IRAs (Traditional, Rollover, SEP, SIMPLE)? This is different from the non-deductible/re-characterized money you put in the TIRAs for 2021 tax year.
Yes, My spouse has ~ $94k in a rollover IRA from many years ago, I believe from her 401k. I think this will be the major pain point in any backdoor decision making.

(5) If either of you does have pretax money in TIRAs, then the backdoor wouldn't be advisable for that person unless and until they can get the pretax money into a 401k/403b/etc. or convert that pretax money to Roth (and pay associated taxes). The latter may not be desired, depending on the size of the pretax balance.
I see your point. How do I estimate the tax for the $94k rollover with a MAGI of $214k? I also have about ~$100k in my TSP - not sure how that factors in.
Would it be possible to move her $94k Rollover IRA into a current 401k/other employer plan? I would probably do that if the fund options and plan fees are good. You'd be out of the market during transit which could last at least a couple weeks.

If she does the full backdoor, including the second step of a Roth conversion, in a year in which she has the Rollover IRA on December 31, then the vast majority of the conversion would be considered taxable income (only $7500/[$94k + $7500] = 7.39% would be considered non-taxable, so 92.61% would be taxable). In that event, it wouldn't make sense for her to do the backdoor unless and until the Rollover IRA is moved to her current 401k, if there is one.

It's probably not advisable for you to do a Roth conversion of her Rollover IRA. With MAGI of $214k, you're in the 24% bracket (which makes sense, because that bracket is when you start becoming ineligible to make direct Roth IRA contributions). Converting $94k to Roth would all be at your marginal tax rates, which means it would be $94k x 0.24 = $22,560 tax bill, plus any state taxes. Generally not advisable to do those sorts of Roth conversions while you're working. Would make more sense to do it when your income is lower, which is generally during retirement.
(6) If you don't have any pretax money in TIRAs, then the backdoor would be straightforward and easy.
And of course, it appears that straightforward and easy won't be my path forward. I do appreciate these insights. Her Rollover is about 15% of total retirement portfolio.
Do you have any Rollover/Traditional/etc. IRAs? If not, then you can do the backdoor without worrying about the pro rata rule. Her Rollover IRA doesn't have any effect on his ability to do the backdoor without prorated taxes.
Last edited by tashnewbie on Tue Jan 24, 2023 10:44 am, edited 1 time in total.
an_asker
Posts: 4361
Joined: Thu Jun 27, 2013 2:15 pm

Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by an_asker »

Shaken_not_Stirred wrote: Tue Jan 24, 2023 10:26 am Thanks all - and @tashnewbie - messing up is what I am trying to avoid, so thank you.
tashnewbie wrote: Tue Jan 24, 2023 9:23 am [...]
(4) Do you or your spouse have any pretax money in IRAs (Traditional, Rollover, SEP, SIMPLE)? This is different from the non-deductible/re-characterized money you put in the TIRAs for 2021 tax year.
Yes, My spouse has ~ $94k in a rollover IRA from many years ago, I believe from her 401k. I think this will be the major pain point in any backdoor decision making.

(5) If either of you does have pretax money in TIRAs, then the backdoor wouldn't be advisable for that person unless and until they can get the pretax money into a 401k/403b/etc. or convert that pretax money to Roth (and pay associated taxes). The latter may not be desired, depending on the size of the pretax balance.
I see your point. How do I estimate the tax for the $94k rollover with a MAGI of $214k? I also have about ~$100k in my TSP - not sure how that factors in.
[...]
I will continue to research the backdoor process along with considering the tax implications of using the bd on her rollover IRA. Many thanks to all.
Looks like you are in the 24% marginal tax bracket. That would mean nearly a quarter of that $94k in federal taxes.
an_asker
Posts: 4361
Joined: Thu Jun 27, 2013 2:15 pm

Re: 2nd Year of Exceeding MAGI for Roth - Questions

Post by an_asker »

tashnewbie wrote: Tue Jan 24, 2023 10:42 am [...]
Would it be possible to move her $94k Rollover IRA into a current 401k/other employer plan? I would probably do that if the fund options and plan fees are good. You'd be out of the market during transit which could last at least a couple weeks.
This would be an option of course!
Generally not advisable to do those sorts of Roth conversions while you're working. Would make more sense to do it when your income is lower, which is generally during retirement.
[...]
True dat. But if you really want to do so, look at it this way ... it is definitely more advisable to do so now than when we did this - in 12/2021 - at the recent market peak :oops:

Yes, my sense of market timing is unerring!!
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