IRA Roth Problem Income too high surprise

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Bunise
Posts: 1
Joined: Mon May 10, 2021 11:09 am

IRA Roth Problem Income too high surprise

Post by Bunise »

Good Afternoon,
Please help kind Bogleheads, I have a problem I've never had before and need advice to fix it. I've been putting money into a Roth IRA for some time, maxing every year with a small amount every month according to Vanguard schedule of auto deposits.

Now today, I find out from my SO that he made too much last year and we are just enough over $200k+ and I can not have my ROTH now :annoyed Please tell me how to best switch over to proper IRA, I suppose a taxed one? I have no idea how to do it. My friend said there is a way to get a backward ROTH later if we don't take the deduction but is unsure. He just heard a rumor here and said I need to make an account and ask people who are more knowledgeable about this and know what they are doing.

Something about recharacterizing the Roth?

I've been trying to call Vanguard to help me and am waiting for 30+ minutes and then they hang up.

Oops, they answered and said if I recharacterize the ROTH into an IRA traditional, it becomes like coffee and cream all mixed up (with old traditional IRA, difficult to separate and keep track on my own and will need to do for life of thee IRA. What? How do you all keep track to do back door later?

Deadline is May 17 but auto extended to Oct 15 if we file on time or file for an extension.

At this point, I am asking for experienced advise. Thank you,

I edited for clarity.
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FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

Re: IRA Roth Problem Income too high surprise

Post by FiveK »

The wiki articles on IRA recharacterization and Backdoor Roth may be helpful.

Do you have access to a 401k/403b/etc. into which you could roll your pre-tax traditional IRA balance? That would be a viable coffee/cream separator.
investmax
Posts: 213
Joined: Thu Mar 11, 2021 7:00 pm

Re: IRA Roth Problem Income too high surprise

Post by investmax »

If your husbands income is 200K, then you have exceeded the limit for 2020 by 4K. I think using the phase out rule you are still eligible to have 3.6K in your Roth IRA

First calculate the above amount. Next check with Vanguard if you can withdraw the difference 6K - 3.6K ~= 2.4K out. This will get complicated because this amount may have gains which will need to be taxed. See it Vanguard can help you on that. You will need to adjust and file this with your 2020 returns.

Point is you may be in the Phase-out band of the Roth IRA, so you will be eligible to have some amount in your Roth IRA this year, may be less than 6K. So you do not need to withdraw all the amount.

Also another question, do you have a Traditional IRA with any tax-deferred amount in it. This could be an old account from a long time ago. This may affect how you approach Roth IRA for next year.
investmax
Posts: 213
Joined: Thu Mar 11, 2021 7:00 pm

Re: IRA Roth Problem Income too high surprise

Post by investmax »

investmax wrote: Mon May 10, 2021 1:27 pm
Also another question, do you have a Traditional IRA with any tax-deferred amount in it. This could be an old account from a long time ago. This may affect how you approach Roth IRA for next year.
Never mind this question. I see you have mentioned you already have a Traditional IRA with tax deferred money in it. So for that as FiveK suggested do you have a 401K, where you can potentially roll your Pre-Tax amounts in, so as to 'clean' your Traditional IRA.
go2run
Posts: 159
Joined: Wed Mar 08, 2017 12:34 pm

Re: IRA Roth Problem Income too high surprise

Post by go2run »

investmax wrote: Mon May 10, 2021 1:27 pm If your husbands income is 200K, then you have exceeded the limit for 2020 by 4K. I think using the phase out rule you are still eligible to have 3.6K in your Roth IRA

First calculate the above amount. Next check with Vanguard if you can withdraw the difference 6K - 3.6K ~= 2.4K out. This will get complicated because this amount may have gains which will need to be taxed. See it Vanguard can help you on that. You will need to adjust and file this with your 2020 returns.

Point is you may be in the Phase-out band of the Roth IRA, so you will be eligible to have some amount in your Roth IRA this year, may be less than 6K. So you do not need to withdraw all the amount.

Also another question, do you have a Traditional IRA with any tax-deferred amount in it. This could be an old account from a long time ago. This may affect how you approach Roth IRA for next year.
Do this! This happened to us a couple of year's ago. Have you completed your taxes yet? The answer to that will determine what you need to do.
First though, you need understand what amount you were eligible to contribute to your Roth IRA's.

If you filed your taxes already:
You can either:

1. Remove the excess within 6 months and file an amended return by October 15—if eligible, you can also remove the excess plus your earnings by this date.
2. Remove the excess once discovered, even after October 15. You'll need to reduce next year's contributions by the excess amount. For example, if your limit is $6,000 and you exceed it by $1,500 in the current year, you can offset the excess by limiting your contributions to $4,500 the following year.

Be aware you'll have to pay a 6% penalty each year until the excess is absorbed or corrected.

If you have not filed your taxes yet:
1. Go to Vanguard.com, search for "Excess Roth IRA Contributions" and select the option to open an Edoc to complete the excess removal.
For this, what account did you transfer the contribution from? Was it a bank account or Vanguard Taxable Account? You will need to remove the excess contribution plus whatever gains you had on that contribution. Vanguard will help determine that amount. The excess contribution + gains should be returned to either your bank account or Vanguard Taxable account. This is the cleanest way to handle it come tax time. You will be taxed on the gains as ordinary income.
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: IRA Roth Problem Income too high surprise

Post by JBTX »

Bunise wrote: Mon May 10, 2021 11:57 am Good Afternoon,
Please help kind Bogleheads, I have a problem I've never had before and need advice to fix it. I've been putting money into a Roth IRA for some time, maxing every year with a small amount every month according to Vanguard schedule of auto deposits.

Now today, I find out from my SO that he made too much last year and we are just enough over $200k+ and I can not have my ROTH now :annoyed Please tell me how to best switch over to proper IRA, I suppose a taxed one? I have no idea how to do it. My friend said there is a way to get a backward ROTH later if we don't take the deduction but is unsure. He just heard a rumor here and said I need to make an account and ask people who are more knowledgeable about this and know what they are doing.

Something about recharacterizing the Roth?

I've been trying to call Vanguard to help me and am waiting for 30+ minutes and then they hang up.

Oops, they answered and said if I recharacterize the ROTH into an IRA traditional, it becomes like coffee and cream all mixed up (with old traditional IRA, difficult to separate and keep track on my own and will need to do for life of thee IRA. What? How do you all keep track to do back door later?

Deadline is May 17 but auto extended to Oct 15 if we file on time or file for an extension.

At this point, I am asking for experienced advise. Thank you,

I edited for clarity.
You still may be able to leave a little in the Roth depending on what MAGI is.

https://www.schwab.com/ira/roth-ira/contribution-limits

When you say income, is that gross or MAGI?
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