Roth IRA options/timing

[inquisitive]

I'm not sure what my income is going to be for 2014. If it's above $114,000 there will be a partial phase-out. If it's above $129,000 I can contribute nothing. What do people do in this situation, should I wait until 2015 to know what my 2014 income was and then make the contribution? Or can I make a contribution now and then pull out money if my income is too high?

If my income is too high is there an alternative to the Roth IRA? I don't have a traditional IRA.

 

[LOL!]

I'm not sure what my income is going to be for 2014. If it's above $114,000 there will be a partial phase-out. If it's above $129,000 I can contribute nothing. What do people do in this situation, should I wait until 2015 to know what my 2014 income was and then make the contribution? Or can I make a contribution now and then pull out money if my income is too high?

If my income is too high is there an alternative to the Roth IRA? I don't have a traditional IRA.

I would wait. It is too much hassle to fix the problem, so do not create the problem to start with.

You may be able to do a "Back door Roth IRA". See, e.g., Backdoor Roth IRA - Bogleheads

Are you aware of how to invest tax-efficiently in a normal account? There are no limits to your contributions, no early withdrawal penalties, taxes are deferred on unrealized capital gains, etc.

 

[panacea]

+1
You can recharacterize the contribution to a nondeductible IRA if you find you've made too much money but it's probably just easier to hold off until after year-end.

 

[Animorph]

I wait until I do the taxes.

 

[Alan]

I'm not sure what my income is going to be for 2014. If it's above $114,000 there will be a partial phase-out. If it's above $129,000 I can contribute nothing. What do people do in this situation, should I wait until 2015 to know what my 2014 income was and then make the contribution? Or can I make a contribution now and then pull out money if my income is too high?

If my income is too high is there an alternative to the Roth IRA? I don't have a traditional IRA.

I did that once but then got an unexpected annual bonus, "earned" during the previous year. It was easy to re-characterize it to a traditional non-deductible IRA.

These days, if you are not certain then you can always do a non-deductible IRA contribution at any time of your choosing, then immediately do a conversion to a ROTH, which you can do regardless of annual income. Silly rule really, they should just remove the annual income limit and save the extra paperwork.

 

[Animorph]

I have assumed that contributing more than you earned to date, as in making a January 2nd max contribution, might be questionable technically. Though it may not be a problem if income comes in as expected. Any experiences with that?

 

[Alan]

I have assumed that contributing more than you earned to date, as in making a January 2nd max contribution, might be questionable technically. Though it may not be a problem if income comes in as expected. Any experiences with that?

If you make a contribution on Jan 2nd 2014 for the tax year 2014 and you later fail to earn more than you contributed you can have the contribution reduced. Many of us get paid at month end so it would not be unusual for a contribution to be made before any earnings had been received.

I once contributed more than the max contribution limit and then contacted Vanguard who refunded the excess contribution to a taxable account, but also calculated the amount it had grown while in the IRA, and that growth was reported as taxable income. There was no tax penalty for early withdrawal from an IRA. At least that's how I remember it happening.

 

[inquisitive]

I'm still confused on this point. If I don't know what my income will be (waiting for last paychecks of this year), can I still do a backdoor Roth in 2015 for calendar year 2014? It's okay for me to wait to do anything until 2015?

 

[youbet]

You might be mixing things up.......

I believe a backdoor Roth involves contributing to a non-deductible TIRA and then converting that TIRA into a Roth IRA. No income limits involved.

 

[inquisitive]

I guess my question is, I don't know if I will be above the limits to contribute to a Roth IRA (or if I will be in the intermediate phase-out range) until after the end of the year.

Is there any downside in making a contribution to a nondeductible TIRA and then converting it into a Roth, or should I wait until 2015 and potentially contribute to a regular Roth without doing a backdoor? (and what do I do if I am in the intermediate range)?

 

[RE2Boys]

As this is December, I'd wait to make any Roth IRA contributions until you know your income for 2014 if you think you may be over the limit. You have until April 15, 2015 to make IRA contributions for 2014, Roth or TIRA.

If over the income limit for a Roth, you have until April 15, 2015 to make a non-deductilbe contribution into a TIRA for 2014. The conversion to a Roth can be done the same day or years later. Just keep good records. If you make a nondeductible TIRA contribution, you will need to file a Form 8606 with your tax return every year until your basis is reduced to zero.

Downside to contributing to a TIRA now and converting at some future date is you need to keep track of your basis via a Form 8606.

 

[mrfeh]

I guess my question is, I don't know if I will be above the limits to contribute to a Roth IRA (or if I will be in the intermediate phase-out range) until after the end of the year.

I'm waiting until I know what our income was for 2014 (we will also be near the cutoff).