2020 over Roth limit, contributed Jan 1, what now?

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Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

2020 over Roth limit, contributed Jan 1, what now?

Post by uwbadgers »

Overall Question: What do I do with the 12k I put in Roth IRA in 2020 that now we will be over the income limit to contribute?

A "good" problem to have but on Jan 1, 2020 we contributed and maxed both of our Roth IRA's (6k each).

Now, while somewhat expected as the year went on, but definite now that the year is wrapping up, I'm pretty sure we will be way over the income limit.

Roughly:

Her: 210k
Him: 40k
Him Single Member LLC: 25k

TOTAL Income: 275k
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Retirement Vessels:

Her 401k
Her Roth IRA
Him Roth IRA
Him Solo401k
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I did some searching here and I see all kinds of stuff on backdoor roth, but that appears to be something you do before......you use the traditional ira and then flip to roth.

But what about this situation?

What's my plan here?

Didn't really think about this at all but now with it being a reality and end of year not sure the best plan.

And, if there are some helpful links/articles, please share. I searched but kept seeing backdoor roth switches only.

Thank you!!!
stan1
Posts: 10049
Joined: Mon Oct 08, 2007 4:35 pm

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by stan1 »

You'll need to do 2 recharacterizations.

https://investor.vanguard.com/ira/ira-r ... hat%20time.)

And then after that is done you can probably convert the Traditional IRAs to Roth IRAs.

If you might be on the income boundary again in 2021 better to just do two Backdoor contributions to begin with.
jhawktx
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Joined: Thu May 19, 2011 8:15 am

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by jhawktx »

And after you do all that, give yourself a good swift kick in the behind for not waiting until later in the year to complete the transaction. I've seen a number of threads with people doing Roth rollovers in January. Why? Any timing benefits will be minor and you run the risk of making a poor decision. Am I unaware of some annual prize for the 1st person to complete a rollover at 12:01:01am on New Years Day?
2Birds1Stone
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Location: New York

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by 2Birds1Stone »

I made this mistake before, but then made an even worse mistake with the recharachterization/conversion. Be careful that you don't already have a T/Rollover IRA, or you could hit pro-rata rules that leave you with a surprise tax bill.
jhawktx
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Joined: Thu May 19, 2011 8:15 am

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by jhawktx »

See OP, be careful or you could suffer the dreaded double kick.
stan1
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Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by stan1 »

jhawktx wrote: Wed Dec 30, 2020 6:42 pm And after you do all that, give yourself a good swift kick in the behind for not waiting until later in the year to complete the transaction. I've seen a number of threads with people doing Roth rollovers in January. Why? Any timing benefits will be minor and you run the risk of making a poor decision. Am I unaware of some annual prize for the 1st person to complete a rollover at 12:01:01am on New Years Day?
The words on this are confusing but important.
Rollover - move balance from one traditional to another traditional account (or Roth account to Roth account). Such as if you are rolling over funds from a former employer's 401K plan to a Traditional IRA, or from a Traditional IRA to current employer's 401K. This is not a taxable event. You would want to roll over a Traditional IRA balance to a Traditional 401K prior to doing Backdoor Roth to avoid pro-rata tax issue.

Conversion - Funds in a Traditional account get converted from Traditional to Roth. This is a taxable event and is the intermediate step in a "Backdoor Roth contribution".

Recharacterization - administrative reversal of a contribution but may be taxable (it gets complicated)
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GerryL
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Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by GerryL »

When that happened to me I didn't realize it until I was doing my taxes. I called (in my case) Vanguard and they moved the original amount (contributed throughout the year) that was above the allowed limit plus the associated earnings to my taxable account. Then I recorded on my taxes only the allowable contribution to the Roth, and I included in income the earnings that had been added to my taxable account. So the figures on my tax return did not match up with the tax forms that had been sent to the IRS.

What was tricky was making sure it was all reconciled on the following year's taxes. There was no intuitive way to do it using tax software, so I just faked it, added comments where possible, and made sure I had it all documented in my files in case the IRS had any questions.

Since at this point my income was going to be bouncing around near the Roth cut off, in future years I did not make any Roth contributions until into the next year, when I knew what would be allowable.
tibbitts
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Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by tibbitts »

The forum does everyone a disservice with the obsession with first-day-of-the-year contributions, which makes no sense. There is the opposite problem as well: someone might not earn enough during the year to contribute to any kind of IRA. Everybody should just take a deep breath and hold off on those contributions.
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Eagle33
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Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by Eagle33 »

tibbitts wrote: Wed Dec 30, 2020 7:14 pm The forum does everyone a disservice with the obsession with first-day-of-the-year contributions, which makes no sense. There is the opposite problem as well: someone might not earn enough during the year to contribute to any kind of IRA. Everybody should just take a deep breath and hold off on those contributions.
Agreed. Many are penny wise and pound foolish.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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celia
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Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by celia »

Eagle33 wrote: Wed Dec 30, 2020 11:12 pm
tibbitts wrote: Wed Dec 30, 2020 7:14 pm The forum does everyone a disservice with the obsession with first-day-of-the-year contributions, which makes no sense. There is the opposite problem as well: someone might not earn enough during the year to contribute to any kind of IRA. Everybody should just take a deep breath and hold off on those contributions.
Agreed. Many are penny wise and pound foolish.
Another Agreed. Too many people do things quickly, without much thought, then we waste our time helping them fix their blunders.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
uwbadgers
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Joined: Mon Aug 25, 2014 3:36 pm

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by uwbadgers »

stan1 wrote: Wed Dec 30, 2020 4:35 pm You'll need to do 2 recharacterizations.

https://investor.vanguard.com/ira/ira-r ... hat%20time.)

And then after that is done you can probably convert the Traditional IRAs to Roth IRAs.

If you might be on the income boundary again in 2021 better to just do two Backdoor contributions to begin with.
Thank you for this.

I've gone ahead and followed the link.

I opened a Traditional IRA

The form basically guides me into the flip from Roth to Trad.....seems pretty straightforward. It says it will transfer in kind to the new account.

I imagine I'll get some tax forms eventually for this transaction but other than that good to go, right?

Anything I'm missing?

And with probably the expected high income again, for 2021 we can just fund the 6k for each of us into the new trad IRA, right?
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Side question, I saw that a trad IRA has a tax deduction....but some wording was confusing.

I do NOT have a retirement plan with my work but my wife does......does that mean we do or do not get to deduct on taxes?


Thanks!

Thanks
stan1
Posts: 10049
Joined: Mon Oct 08, 2007 4:35 pm

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by stan1 »

uwbadgers wrote: Fri Jan 01, 2021 11:51 am I do NOT have a retirement plan with my work but my wife does......does that mean we do or do not get to deduct on taxes?
You wrote that you have a solo 401K. Are you contributing to it?
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: 2020 over Roth limit, contributed Jan 1, what now?

Post by uwbadgers »

stan1 wrote: Fri Jan 01, 2021 11:56 am
uwbadgers wrote: Fri Jan 01, 2021 11:51 am I do NOT have a retirement plan with my work but my wife does......does that mean we do or do not get to deduct on taxes?
You wrote that you have a solo 401K. Are you contributing to it?
Yes, that is correct, I do have one through my LLC, but not through my W2 job.

I created and contributed to it last year (2020).
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