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Woohoo extra money... Oh no what about my Roth
Old 12-04-2019, 07:36 AM   #1
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Woohoo extra money... Oh no what about my Roth

The title are the two thoughts that have gone through my head. My company is being acquired and this triggered a nice lump sum payment for myself. This is great and will help my FI plans however I fully funded my Roth and a spousal Roth IRA at the beginning of the year. Since I caught it in the same tax year my research leads me to believe I simply pull the contribution out of both Roth accounts and pay a 10% penalty on the earnings (I'm younger then 59.5) but avoid the 6% penalty on the contribution. Does this sound correct to the knowledgeable folks here?

PS I believe I have to claim the earnings as income

Thanks
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Old 12-04-2019, 07:55 AM   #2
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You are correct in how to handle it and the tax implications only on the earnings portion.
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Old 12-04-2019, 08:09 AM   #3
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just curious how the 2 events are related?
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Old 12-04-2019, 08:24 AM   #4
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just curious how the 2 events are related?
Roth has income caps.

https://www.irs.gov/retirement-plans...-make-for-2019
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Old 12-04-2019, 08:42 AM   #5
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Aha! I totally forgot about that roth Income Cap...but clearly I am not close to the income cap...yet!
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Old 12-04-2019, 08:46 AM   #6
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thanks.......brain not in gear yet
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Old 12-04-2019, 09:10 PM   #7
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You are correct in how to handle it and the tax implications only on the earnings portion.
Thank you very much. I appreciate the help.
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Old 12-04-2019, 10:58 PM   #8
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Can you recharacterize them as nondeductible IRAs and then convert them back into Roths? You would still pay the tax on the earnings. This won't work if you have traditional IRAs.
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Old 12-05-2019, 02:24 AM   #9
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I would check with the IRA custodian to see if they have a Return of Excess Contributions form to ensure that this gets accounted for and reported correctly.
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Old 12-05-2019, 08:54 AM   #10
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+1 Need to do return of excess contributions.... return of contribution will be tax free and you'll pay tax and the 10% penalty on earnings.
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Old 12-05-2019, 09:08 AM   #11
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After removing the contributions from your Roth (however is the best way to do that), if you don't have any other pre-tax IRAs, you could set up a traditional IRA, fund it with after-tax dollars, and then roll that into your Roth. This way you'll still make your same Roth contributions.

Though, this being said, I don't know if removing your prior contributions from your Roth would change the availability of doing a Roth conversion this year. Hopefully someone more knowledgeable on this will chime in. I just did my first Roth conversion this year (wish I knew about this earlier), so I'm far from an expert on it.
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Old 12-05-2019, 02:32 PM   #12
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Interesting. So the ROTH IRA is at vanguard and I also have a rollover tIRA there as well. I have plenty in the tIRA to do a conversion to ROTH with older dollars if I withdrew the invalid ROTH contribution this year and instead placed that in my tIRA. Then perform a Roth conversion from the existing funds. Am I understanding the basics of this right. Would I have to pay tax on the roth conversion at my current bracket. If that is the case I will have to review the brackets again and see where I fall after this lump sum is realized.
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Old 12-05-2019, 03:12 PM   #13
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Originally Posted by upupandaway View Post
Interesting. So the ROTH IRA is at vanguard and I also have a rollover tIRA there as well. I have plenty in the tIRA to do a conversion to ROTH with older dollars if I withdrew the invalid ROTH contribution this year and instead placed that in my tIRA. Then perform a Roth conversion from the existing funds. Am I understanding the basics of this right. Would I have to pay tax on the roth conversion at my current bracket. If that is the case I will have to review the brackets again and see where I fall after this lump sum is realized.
You'd have to pay taxes at your current bracket, correct. If you wanted to avoid that, if you have a current 401K, you could rollover your rollover IRA into the 401K. This would then give you a clean slate to set up a tIRA and fund it all with after tax dollars the same way you would your Roth IRA in a year where you weren't over the income limits, and then do a Roth conversion with this. But, the downside to this is that you won't have as many investment options in a 401K as you would in the IRA if you were to roll that over.
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Old 12-05-2019, 05:09 PM   #14
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If you going to put the funds back in the TIRA, why not just recharacterize the Roth contribution to a TIRA contribution. That way you won't have to pay the 10% penalty and the earnings stay within the IRA shelter.
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Old 12-05-2019, 09:59 PM   #15
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I will look into this I just don't know anything about recharachterizing a contribution. New territory for me
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Old 12-05-2019, 10:23 PM   #16
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https://www.irs.gov/retirement-plans...-contributions

please note that you are recharacterizing a contribution which is still allowed. You can not recharacterize a conversion any more.
The IRA custodian should know what to do.
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