Roth IRA withdrawal and Trad IRA contribution in same year?

[pirsquared]

Can I withdraw from a Roth IRA and contribute to a Traditional IRA in the same year and still take the tax deduction for the Traditional IRA contribution, assuming I am otherwise eligible for the tax deduction? The purpose of this would be to manage MAGI for ACA purposes.

Thanks!

 

[pb4uski]

I can't think of why you couldn't do that as long as you are eligible to withdraw from the Roth IRA with no penalty (withdrawing contributions or you are over 59-1/2, etc.)

 

[gauss]

Roth Conversion Recharacterizations are no longer allowed since 2018 TCJA went into effect. I just wanted to make sure that you weren't trying to do this.

Also you can't contribute the maximum in a given year to both a Roth and a traditional IRA.

Those are the two pitfalls I see offhand.

I believe that Roth Contribution Recharacterizations are still allowed.

-gauss

 

[pirsquared]

I can't think of why you couldn't do that as long as you are eligible to withdraw from the Roth IRA with no penalty (withdrawing contributions or you are over 59-1/2, etc.)

Thanks! My husband and I file jointly and we would be withdrawing from his Roth IRA (because he is over 59.5) and contributing to one or both of our Traditional IRAs. Looking at the "IRA Deduction Worksheet" in the IRS instructions for Schedule 1, I don't see anything about a withdrawal (from either type of IRA) affecting the deduction. But I thought I might be missing something. Spouse is over 59.5 but not old enough for any RMDs.

 

[Sunset]

It can be done, but the Roth withdrawal does not count as earned income towards IRA contributions.

Do you have earned income ?

 

[Sunset]

Thanks! My husband and I file jointly and we would be withdrawing from his Roth IRA (because he is over 59.5) and contributing to one or both of our Traditional IRAs. Looking at the "IRA Deduction Worksheet" in the IRS instructions for Schedule 1, I don't see anything about a withdrawal (from either type of IRA) affecting the deduction. But I thought I might be missing something. Spouse is over 59.5 but not old enough for any RMDs.

A person over the age of 59.5 can withdraw from IRA's without penalty and does not have to wait for RMD's.

 

[pirsquared]

Roth Conversion Recharacterizations are no longer allowed since 2018 TCJA went into effect. I just wanted to make sure that you weren't trying to do this.

Also you can't contribute the maximum in a given year to both a Roth and a traditional IRA.

Those are the two pitfalls I see offhand.

I believe that Roth Contribution Recharacterizations are still allowed.

-gauss

Thanks! We are not trying to recharacterize, unless I am misunderstanding what that means. It may be advantageous to contribute to T-IRAs to reduce our taxable income for ACA purposes. However, we may want/need to withdraw from a Roth IRA in order to have the funds to contribute to the T-IRA. I was thinking of totally separate transactions. I just don't want a Roth withdrawal to make us ineligible for a T-IRA tax deduction (for which we would otherwise be eligible) because that would be the only point of the Roth withdrawal.

 

[gauss]

Ok Sounds Good. Thanks for the clarification.

 

[pirsquared]

It can be done, but the Roth withdrawal does not count as earned income towards IRA contributions.

Do you have earned income ?

Thanks! Yes, we have earned income. My husband is retired, but I work and make more than twice the contribution limit, making us eligible to each contribute the full amount since we file jointly.

 

[pirsquared]

Thanks! We are not trying to recharacterize, unless I am misunderstanding what that means. It may be advantageous to contribute to T-IRAs to reduce our taxable income for ACA purposes. However, we may want/need to withdraw from a Roth IRA in order to have the funds to contribute to the T-IRA. I was thinking of totally separate transactions. I just don't want a Roth withdrawal to make us ineligible for a T-IRA tax deduction (for which we would otherwise be eligible) because that would be the only point of the Roth withdrawal.

Quoting myself to clarify. We would withdraw from the Roth to have enough funds overall to contribute to the T-IRA, but we have more earned income than we would be contributing to the IRA.

 

[pirsquared]

I also realize that this strategy may or may not be wise. At this point, I just want to know if it would work. That way, if we need to contribute some to a T-IRA to get us under a certain amount for ACA purposes, we can. Even if we then decide to withdraw from a Roth to "make up" for that amount.

 

[Sunset]

I also realize that this strategy may or may not be wise. At this point, I just want to know if it would work. That way, if we need to contribute some to a T-IRA to get us under a certain amount for ACA purposes, we can. Even if we then decide to withdraw from a Roth to "make up" for that amount.

I see no issues with it, an interesting income adjustment.

I guess you are pretty careful about interest earnings and surprise fund announcements of declared dividends and capital gains as well.

I know this year for us, interest will be much higher, and will have to tediously add up all the sources to get close to the actual number.

 

[pirsquared]

I guess you are pretty careful about interest earnings and surprise fund announcements of declared dividends and capital gains as well.

I know this year for us, interest will be much higher, and will have to tediously add up all the sources to get close to the actual number.

I are trying to keep careful track of interest and limit managed funds, but I am still learning new things all the time. I have always been interested in taxes, but my husband's 2020 pandemic layoff led to an early retirement and thus the ACA and other retirement-related issues.

 

[N02L84ER]

FYI. If you normally qualify for the Saver's Credit, know that any withdrawal from any tax deferred or Roth account will disqualify you for the Saver's Credit.

 

[SecondCor521]

FYI. If you normally qualify for the Saver's Credit, know that any withdrawal from any tax deferred or Roth account will disqualify you for the Saver's Credit.

...only to the extent that they offset, I think. A $6,000 Roth IRA distribution and $12,000 of traditional IRA contributions, for example, could still enable an MFJ couple to take the Saver's credit provided their AGI was in range. See Form 8880 line 4.

OP, I think what you're doing can work, although it's an uncommon thing since most people would rather leave the money in the Roth and would choose to contribute to the traditional IRA either out of current income or from taxable savings/investments.

You might also consider HSA contributions. If you're eligible and like HSAs, they also reduce AGI for purposes of ACA.

 

[pirsquared]

FYI. If you normally qualify for the Saver's Credit, know that any withdrawal from any tax deferred or Roth account will disqualify you for the Saver's Credit.

Thanks! I will make sure to factor this in.

 

[pirsquared]

OP, I think what you're doing can work, although it's an uncommon thing since most people would rather leave the money in the Roth and would choose to contribute to the traditional IRA either out of current income or from taxable savings/investments.

Right, I'm not sure yet if this would end up being beneficial, but there may be one or two years where it would be. I will do the math, but I first wanted to check whether this was even an option.

Oh, and you mentioned HSAs. My husband recently started Medicare so he can no longer contribute to an HSA. However, I will be looking into the possibility of HSA-eligible ACA plans for myself for 2024. I need to weigh a lot of variables, though, because right now we qualify for CSRs which is really nice. But not nearly as valuable as when we has DH, DD, and I all on ACA. Now, with just me on an ACA plan (DH is on Medicare, DD has a job with benefits), the CSRs are not as valuable.

 

[SecondCor521]

Right, I'm not sure yet if this would end up being beneficial, but there may be one or two years where it would be. I will do the math, but I first wanted to check whether this was even an option.

Oh, and you mentioned HSAs. My husband recently started Medicare so he can no longer contribute to an HSA. However, I will be looking into the possibility of HSA-eligible ACA plans for myself for 2024. I need to weigh a lot of variables, though, because right now we qualify for CSRs which is really nice. But not nearly as valuable as when we has DH, DD, and I all on ACA. Now, with just me on an ACA plan (DH is on Medicare, DD has a job with benefits), the CSRs are not as valuable.

I did a Silver plan for the first few years of retirement in order to get those CSRs. Eventually I realized that I could get a lower cost Bronze HSA eligible plan, pay zero out of pocket, and fund an HSA. The Bronze HSA plan doesn't really cover anything until a very high deductible, but I'm willing to take that risk for the lower cost and HSA funding since I've historically been (knock wood) healthy. I think I'm ahead, but it's only been a few years.

Good luck whatever you decide.

 

[pirsquared]

I did a Silver plan for the first few years of retirement in order to get those CSRs. Eventually I realized that I could get a lower cost Bronze HSA eligible plan, pay zero out of pocket, and fund an HSA. The Bronze HSA plan doesn't really cover anything until a very high deductible, but I'm willing to take that risk for the lower cost and HSA funding since I've historically been (knock wood) healthy. I think I'm ahead, but it's only been a few years.

Good luck whatever you decide.

Thanks! I may be at that point also, where a Bronze HSA eligible plan becomes a better deal than a Silver with CSRs. With three of us on a Silver plan with CSRs, we were hitting the out of pocket max and really benefitting, but with just me on the plan I have not even hit the deductible.

 

[N02L84ER]

...only to the extent that they offset, I think. A $6,000 Roth IRA distribution and $12,000 of traditional IRA contributions, for example, could still enable an MFJ couple to take the Saver's credit provided their AGI was in range. See Form 8880 line 4.

Did not realize that. Thanks. We pulled $22K from a beneficiary IRA and put $14K into our traditional IRAs and Turbo Tax just told me that we did not qualify for the Savers Credit because of the withdrawal.

 

[SecondCor521]

Did not realize that. Thanks. We pulled $22K from a beneficiary IRA and put $14K into our traditional IRAs and Turbo Tax just told me that we did not qualify for the Savers Credit because of the withdrawal.

Right, that's because your $withdrawal > $contribution. OP seems to be in the opposite situation.

 

[pirsquared]

I did a Silver plan for the first few years of retirement in order to get those CSRs. Eventually I realized that I could get a lower cost Bronze HSA eligible plan, pay zero out of pocket, and fund an HSA. The Bronze HSA plan doesn't really cover anything until a very high deductible, but I'm willing to take that risk for the lower cost and HSA funding since I've historically been (knock wood) healthy. I think I'm ahead, but it's only been a few years.

Good luck whatever you decide.

I have been thinking about this more and I think that going with an HSA-eligible marketplace plan for 2024 and maxing the HSA would accomplish my purposes much better than withdrawing from a Roth to fund a Traditional IRA. I could get the tax deduction on the full amount of the HSA contribution and use some of those funds to pay for health care expenses, correct? I was reading the IRS instructions for Form 8889 and it appears that I can even pay my LTC insurance premiums out of an HSA, which would be helpful.

I know that it is ideal to let the funds in an HSA grow, but if I need both the funds and the tax deduction, then that would be the way to go. This is a short-term issue as we are trying to have DH make it to 70 (4 years) before starting to draw Social Security so we can max out the survivor's benefit for me (14 years younger). We also would like to avoid drawing from other retirement accounts before we need to; thus, a short term need to get by on less income.

 

[Sunset]

I have been thinking about this more and I think that going with an HSA-eligible marketplace plan for 2024 and maxing the HSA would accomplish my purposes much better than withdrawing from a Roth to fund a Traditional IRA. I could get the tax deduction on the full amount of the HSA contribution and use some of those funds to pay for health care expenses, correct? I was reading the IRS instructions for Form 8889 and it appears that I can even pay my LTC insurance premiums out of an HSA, which would be helpful.

I know that it is ideal to let the funds in an HSA grow, but if I need both the funds and the tax deduction, then that would be the way to go. This is a short-term issue as we are trying to have DH make it to 70 (4 years) before starting to draw Medicare so we can max out the survivor's benefit for me (14 years younger). We also would like to avoid drawing from other retirement accounts before we need to; thus, a short term need to get by on less income.

Medicare starts at 65 , you can start medicare without starting SS. That is what we did.

Maybe you meant to say: "before starting to draw " Social Security ?

 

[pirsquared]

Medicare starts at 65 , you can start medicare without starting SS. That is what we did.

Maybe you meant to say: "before starting to draw " Social Security ?

Yes! This is what I meant. My brain is too tired after a busy week. DH already started Medicare at 65 and we hope to hold out until he is 70 to start drawing Social Security. I will try to edit my other post.

 

[SecondCor521]

I have been thinking about this more and I think that going with an HSA-eligible marketplace plan for 2024 and maxing the HSA would accomplish my purposes much better than withdrawing from a Roth to fund a Traditional IRA. I could get the tax deduction on the full amount of the HSA contribution and use some of those funds to pay for health care expenses, correct? I was reading the IRS instructions for Form 8889 and it appears that I can even pay my LTC insurance premiums out of an HSA, which would be helpful.

Correct, with the exception that you can only use them for medical expenses incurred after you establish your HSA. In my state the HSA is established on the date of the first contribution.

If you want to play the typical HSA game, you can contribute, invest the money, incur an eligible expense, then withdraw for the expense much later, after the money has been invested for years and hopefully grown. Put in $1K, have it grow to $2K, withdraw for a $1K expense, and now you have $1K extra that is completely tax free for other medical expenses. (If you need the tax / cash flow, well, this isn't as much of an option.)

LTC insurance premiums are medical expenses for the purposes of an HSA. Note that there are age-based limitations on how much you can deduct - see the information in Schedule A for those limits.

In addition to LTC stuff and ordinary medical stuff, generally OTC stuff also is eligible.

You generally should be able to contribute to an HSA for each month you are covered solely by an HSA-eligible plan. The annual limit is adjusted for inflation each year, but it's somewhere around $4K for single coverage, which is likely in your case since your husband is on Medicare. If/when you're over 55, you can add a $1K catchup contribution as well, for a total of $5K per year.

HSA contributions can also be made any time until tax filing the next year (like IRA contributions). So if you want to dial in your AGI exactly (something I usually do), you can contribute, say, $3K to your HSA during the year, then figure out your taxes in the spring, then make a top-off contribution of $387 or whatever to the HSA for the previous year to get your AGI to an exact dollar figure, assuming you got within $387 in December during your planning phase.