Author Topic: over contributed to IRA  (Read 668 times)

frugalnacho

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over contributed to IRA
« on: January 17, 2018, 11:20:42 AM »
I didn't know at the start of the year, but I ended up selling my second house in 2017 and have a lot of LTCG.  Enough LTCG that I am in the phase out range for being able to deduct my tIRA contributions.  I already maxed my IRA ($5500) for 2017, which is going to be over the limit by approximately $4k (I'll know more exactly once all my tax forms come in and I complete my taxes).  I've already maxed my tIRA for 2018 (I won't be anywhere close to the phase out income in 2018 so that's fine), which precludes me from carrying over my excess contributions to 2018.

The IRA is at vanguard, and they have a form I can fill out to remove my excess contributions.  It looks pretty straight forward, my plan is to undo whatever amount I need and just move the funds into my taxable brokerage account using the form.   If I understand correctly I will not be subject to the 6% penalty for over contribution, the "contribution" I made will come out and be moved to my brokerage account with no consequences, but the "growth" will be counted as regular income (for 2017, the year of the original contribution) AND be assessed the 10% early withdraw penalty.  I believe vanguard will automatically do the math for me and move the appropriate amount once I specify the amount of contributions I want removed. This extra income however will increase my income (obviously) and thus restrict my tIRA contribution even further.  With about $4k of excess contributions I am expecting several hundred in "extra" income from the growth.

Is there an easy way to figure out exactly where the cut off is so I contribute the max to my IRA without leaving any tax advantaged space on the table?  I don't know the exact amount that will be counted as "growth", and I don't know if I can possibly know until after it's done since it will depend on account value at the time of execution.

Obviously my goal is to minimize the penalty I pay, and minimize the taxes I pay while maximizing my tIRA contribution. 

 

 

Lucky Recardito

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Re: over contributed to IRA
« Reply #1 on: January 17, 2018, 11:44:05 AM »
What about just recharacterizing your 2017 IRA contribution as Roth rather than Traditional? Unless you're over the Roth contribution limit, this would likely be easier than removing excess contributions, while still offering a tax benefit.

frugalnacho

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Re: over contributed to IRA
« Reply #2 on: January 17, 2018, 12:20:15 PM »
I believe I am below the ROTH income limits (I am in the phase out range for tIRA for MFJ).  My taxes aren't finalized yet, but it looks like I am far below the MFJ roth income limits. 

That sounds like a much better plan.

tralfamadorian

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Re: over contributed to IRA
« Reply #3 on: January 18, 2018, 08:48:20 AM »
What about just recharacterizing your 2017 IRA contribution as Roth rather than Traditional? Unless you're over the Roth contribution limit, this would likely be easier than removing excess contributions, while still offering a tax benefit.

This is what I've ended up doing the last few years.