ROTH conversion with higher AGI

[Tykimeister]

I have been maxing my ROTH IRA since age 26 and I am 35 now. My AGI for 2021 is going to be fairly close to the AGI limit of $139,000 for a ROTH IRA contribution.

I changed employers in 2021 and I have a 401 (a) state pension benefit plan that has a balance of ~$40,000. I want to convert that account into a ROTH IRA (assuming that is possible) but I am not sure if doing so will impact my AGI for making my 2021 ROTH IRA contribution for 2021?

Will the $40,000 contribute to my AGI in 2021?

Also, will I have to pay taxes on the $40,000 at a higher rate since I make much more money now, compared to previous years of much less income?

 

[SevenUp]

Assuming you may and do make the $40K conversion, it
- will add $40K to your AGI, but
- will not add anything to your MAGI for Roth IRA purposes

The marginal tax rate you will pay on the $40K depends on the rest of your tax situation.

You might be able to estimate your 2021 tax by using 2020 tax software, or wait a few weeks for 2021 commercial software, or use a 2021 tax estimation tool like the case study spreadsheet.

 

[Tykimeister]

Assuming you may and do make the $40K conversion, it
- will add $40K to your AGI, but
- will not add anything to your MAGI for Roth IRA purposes

The marginal tax rate you will pay on the $40K depends on the rest of your tax situation.

You might be able to estimate your 2021 tax by using 2020 tax software, or wait a few weeks for 2021 commercial software, or use a 2021 tax estimation tool like the case study spreadsheet.

Thank you for this information. I think this about answers my questions.

What happens if you contribute to a ROTH IRA in 2021 but find out in December 2021 your MAGI is over the limit?

 

[pb4uski]

... What happens if you contribute to a ROTH IRA in 2021 but find out in December 2021 your MAGI is over the limit?

You can do a withdrawal of excess contribution.

https://investor.vanguard.com/ira/excess-contribution

 

[pb4uski]

.... You might be able to estimate your 2021 tax by using 2020 tax software, or wait a few weeks for 2021 commercial software, or use a 2021 tax estimation tool like the case study spreadsheet.

https://www.irscalculators.com/tax-calculator is free and easy to use.

 

[SecondCor521]

You can do a withdrawal of excess contribution.

https://investor.vanguard.com/ira/excess-contribution

That's one of the better options.

Two other options:

1. Recharacterize the excess Roth contribution to a non-deductible traditional IRA contribution. Then, if desired and still allowed by law, do a backdoor Roth by converting it back to the Roth IRA.

2. Leave it in and pay a 6% excise tax on the excess contribution every year until you correct the problem.

 

[SevenUp]

You might be able to estimate your 2021 tax by using 2020 tax software, or wait a few weeks for 2021 commercial software, or use a 2021 tax estimation tool like the case study spreadsheet.

https://www.irscalculators.com/tax-calculator is free and easy to use.

Having looked at many of the spreadsheet and web tool tax estimation programs, the case study spreadsheet (link above) seems easy to use and the most comprehensive. But it's somewhat a matter of taste....

 

[Tykimeister]

You can do a withdrawal of excess contribution.

https://investor.vanguard.com/ira/excess-contribution

Thank you for the info!

 

[Tykimeister]

I seem to keep putting this off.

I anticipate making considerable more money in 2022. If I convert my 401 (a) into a ROTH IRA in the first week or two of January 2022, is there any way I can make the conversion based on my 2021 income?

 

[SevenUp]

Conversions are treated as income in the same tax year as the conversion year, so if you convert in 2022 it will add to your 2022 taxable income.