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Roth IRA Income Limits
Old 07-20-2018, 12:21 PM   #1
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Roth IRA Income Limits

Hi,

I just realized that sometime in the next 1-3 years (potentially this year - 2018), we will be over the income limits for Roth IRA contributions. That has brought up a few questions that I'm hoping all of you smart people here can help me with!

1) What happens if we (my wife & I) each contribute our $5,500 to our Roth IRA accounts and then we find out when filing our income taxes that our MAGI was above the limit? Can we "undo" those contributions somehow? If so, then what happens to any of the gains that were made during that time? Or do we need to pay very close attention to this throughout the year and only contribute what is allowed to avoid any penalties?

2) Any suggestions on what we should do once we do get above the income limits (either phased out or completely above)?

We currently max out both of our Roth 401k. My wife's 401k allows after tax contributions and then in-plan Roth conversions, so that's an option. But, that takes away the ability to withdrawal the contributions for free anytime and that was shaping up to be a part of our ER strategy.

2b) I've read a bit about the backdoor Roth and it seems like that would be the preferred option? We don't have any money in a Traditional IRA currently. What is the suggested method of doing this conversion? Contribute in one lump sum to the traditional IRA and then convert immediately to avoid any taxes on gains? We currently have contributions made monthly so it's spread throughout the year.

The other option is to just contribute to brokerage of course, but of course I'd like to use any tax advantaged accounts that I can.

Thanks for the help!!
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Old 07-20-2018, 12:28 PM   #2
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We did the backdoor option by opening a tIRA, depositing the money, and rolling it over to. Roth IRA as soon as the money appears in the account.
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Old 07-20-2018, 12:36 PM   #3
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Originally Posted by Dash man View Post
We did the backdoor option by opening a tIRA, depositing the money, and rolling it over to. Roth IRA as soon as the money appears in the account.
That's exactly what I did last year and this year.
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Old 07-20-2018, 01:10 PM   #4
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Thanks for the replies, I appreciate it! It seemed that backdoor Roth was the best option, but I want to get some opinions on it so I figured I'd see what everyone thought.

Also, does anybody have any insight on what happens during the year that you go over the income limit? Can you "undo" contributions and are there penalties associated with that? Or what are my options?

Thanks!
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Old 07-20-2018, 01:13 PM   #5
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You can talk to your broker to get the contribution Recharacterized to a traditional IRA.
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Old 07-20-2018, 01:27 PM   #6
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Quote:
Originally Posted by SkinsFan0521 View Post
Hi,

I just realized that sometime in the next 1-3 years (potentially this year - 2018), we will be over the income limits for Roth IRA contributions. That has brought up a few questions that I'm hoping all of you smart people here can help me with!

1) What happens if we (my wife & I) each contribute our $5,500 to our Roth IRA accounts and then we find out when filing our income taxes that our MAGI was above the limit? Can we "undo" those contributions somehow? If so, then what happens to any of the gains that were made during that time? Or do we need to pay very close attention to this throughout the year and only contribute what is allowed to avoid any penalties?

2) Any suggestions on what we should do once we do get above the income limits (either phased out or completely above)?

We currently max out both of our Roth 401k. My wife's 401k allows after tax contributions and then in-plan Roth conversions, so that's an option. But, that takes away the ability to withdrawal the contributions for free anytime and that was shaping up to be a part of our ER strategy.

2b) I've read a bit about the backdoor Roth and it seems like that would be the preferred option? We don't have any money in a Traditional IRA currently. What is the suggested method of doing this conversion? Contribute in one lump sum to the traditional IRA and then convert immediately to avoid any taxes on gains? We currently have contributions made monthly so it's spread throughout the year.

The other option is to just contribute to brokerage of course, but of course I'd like to use any tax advantaged accounts that I can.

Thanks for the help!!
1. Yes, you can undo a Roth IRA contribution - just call your custodian and tell them how much to undo. They will also undo any associated income or gains for you. See "Excess Contributions Withdrawn by Due Date of Return" here: https://www.irs.gov/publications/p59...link1000230873

2. I just started buying investments in a taxable brokerage account, but I'd do a Roth backdoor before I invested in a taxable. Can't advise you on the options you mention here as they came too late for me. LTBH in a taxable account is really pretty good from a tax standpoint anyway. You don't get tax deferral on the dividends, but in my case I buy VTSAX and the dividends get qualified treatment and get spent anyway.

2b. Yes, the general strategy is to convert any contributions ASAP to avoid taxes on gains. You can either contribute in one lump sum and convert once, or contribute monthly and convert monthly, whatever works best for you.
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Old 07-20-2018, 02:04 PM   #7
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Originally Posted by SkinsFan0521 View Post
We currently max out both of our Roth 401k. My wife's 401k allows after tax contributions and then in-plan Roth conversions, so that's an option. But, that takes away the ability to withdrawal the contributions for free anytime and that was shaping up to be a part of our ER strategy.
I think you've gotten answers to your other questions, but I'm not sure if this one was addressed. If you contribute to a Roth 401K, then when you leave the company, you can rollover the entire 401K.

Your pre-tax contributions and all employer contributions and earnings thereon go to a tIRA, which you will have to open if you don't have one by then. The Roth contributions and earnings go to your Roth IRA. At that point, you can withdraw the entire amount that was in the Roth portion of the 401K, as long as the Roth IRA it was rolled into is at least 5 years old.

See here:

https://www.investopedia.com/article...k-rollover.asp

Quote:
From Roth 401(k) to IRA
If the rollover is to a Roth IRA instead, the holding period within the Roth 401(k) does not carry over. That is, if the client has an existing Roth IRA, once the Roth 401(k) distribution is in the account, it has the same holding period as the Roth IRA funds. Let's assume, for example, that the Roth IRA was opened in 2000. You worked at your employer from 2006-2009 and were then let go or quit. Because the Roth IRA that you are rolling the funds into has been in existence for more than five years, the full distribution rolled into the Roth IRA meets the five-year rule for qualified distributions. On the other hand, if you did not have an existing Roth IRA and had to establish one for purposes of the rollover, the five-year period begins the year the Roth IRA was opened, regardless of how long you have been contributing to the Roth 401(k).
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Old 07-20-2018, 04:15 PM   #8
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Originally Posted by Dash man View Post
You can talk to your broker to get the contribution Recharacterized to a traditional IRA.
I thought that that beginning with tax year 2018, you could no longer recharacterize Roth IRA's... am I wrong on this?
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Old 07-20-2018, 04:24 PM   #9
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Originally Posted by bizlady View Post
I thought that that beginning with tax year 2018, you could no longer recharacterize Roth IRA's... am I wrong on this?
You may recharacterize Roth contributions.


You may not recharacterize traditional IRA to Roth conversions.
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Old 07-20-2018, 04:42 PM   #10
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On irs.gov:
Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.
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