Roth income eligibility Qs

[Villanelle]

Never thought I'd have this "problem", but I'm looking at the Roth income limits.  It's based on MAGA... does that mean that cap gains are included?  We sold a house in 2024 and the cap gains along with our income would put us over the MFJ limits.  Thankfully, we didn't contribute to your 2024 Roths because I was anticipating this once we started talking seriously about selling the house, but I want to confirm this is correct.

Also, what happens if you contribute and then end up over the limit?  2025 looks to be a complicated year and I'm accidentally getting paid far more than usual, and not sure how long that will continue so we could end up over.  If I stashed money in both our Roths now (for 2025, plus anything we do for 2024 if I'm mistaken above and we are eligible), and then end up over the income limit, what happens?  Will the IRS show up at my home and give me 50 lashes? 

[terran]

See worksheet 2-1 in Publication 590 for what's included in MAGI for Roth purposes. Yes, capital gains are included. You probably know this, but if you've lived in the house as your primary residence for at least 2 of the last 5 years then a married couple can exclude up to $500k of gains from the sale. There are some exceptions that still let you claim the exclusion if you lived there less time.

If you over contribute to a Roth IRA you'll owe tax on the gains and penalty on the over contribution until removed. I'd just wait until you have final income numbers or contribute to backdoor Roth if you don't have any previously deducted traditional IRAs.

[bacchi]

If the excess contribution was removed in a timely manner (e.g., before the filing deadline), there is no penalty. This was changed with the Secure 2.0 act.

To avoid the 6% tax on excess contributions, you must withdraw:

* the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
* any income earned on the excess contribution.

You'll of course have to pay tax on the earnings.

[Villanelle]

See worksheet 2-1 in Publication 590 for what's included in MAGI for Roth purposes. Yes, capital gains are included. You probably know this, but if you've lived in the house as your primary residence for at least 2 of the last 5 years then a married couple can exclude up to $500k of gains from the sale. There are some exceptions that still let you claim the exclusion if you lived there less time.

If you over contribute to a Roth IRA you'll owe tax on the gains and penalty on the over contribution until removed. I'd just wait until you have final income numbers or contribute to backdoor Roth if you don't have any previously deducted traditional IRAs.

Because my spouse was, until recently, active duty, we actually qualified for 2/15, but still missed it, so Uncle Sam gets his cut. 

Seems like 2024 is definitely out for us, and I guess I'll wait until next Janurary to see about 2025.  Or just go Trad instead of Roth.

[EvenSteven]

See worksheet 2-1 in Publication 590 for what's included in MAGI for Roth purposes. Yes, capital gains are included. You probably know this, but if you've lived in the house as your primary residence for at least 2 of the last 5 years then a married couple can exclude up to $500k of gains from the sale. There are some exceptions that still let you claim the exclusion if you lived there less time.

If you over contribute to a Roth IRA you'll owe tax on the gains and penalty on the over contribution until removed. I'd just wait until you have final income numbers or contribute to backdoor Roth if you don't have any previously deducted traditional IRAs.

Because my spouse was, until recently, active duty, we actually qualified for 2/15, but still missed it, so Uncle Sam gets his cut. 

Seems like 2024 is definitely out for us, and I guess I'll wait until next Janurary to see about 2025.  Or just go Trad instead of Roth.

If you mean traditional as a part of a backdoor Roth then thumbs up. But the income limit for deductibility of a traditional IRA is lower than the income limit for a direct Roth contribution.

[terran]

But the income limit for deductibility of a traditional IRA is lower than the income limit for a direct Roth contribution.

It's lower if you're covered by a retirement plan at work, it's the same if you're not covered but your spouse is, there's no limit if neither are covered

[Villanelle]

But the income limit for deductibility of a traditional IRA is lower than the income limit for a direct Roth contribution.

It's lower if you're covered by a retirement plan at work, it's the same if you're not covered but your spouse is, there's no limit if neither are covered

DH has a 403b, and I have nothing, so it sounds like our trad income limit is the same as the Roth limit, for both of us.  Is that correct? 

[terran]

But the income limit for deductibility of a traditional IRA is lower than the income limit for a direct Roth contribution.

It's lower if you're covered by a retirement plan at work, it's the same if you're not covered but your spouse is, there's no limit if neither are covered

DH has a 403b, and I have nothing, so it sounds like our trad income limit is the same as the Roth limit, for both of us.  Is that correct?

No, IRA's are individual accounts, so look at them at the individual level. You husband has a 403(b) that presumably he or his employer contributes, hence he is covered by a retirement plan at work and is therefore subject to that IRA limit (lower than Roth contribution limits). You are not covered by a retirement plan at work, but your spouse is, so you're subject to that limit (equal to Roth contribution limits).

[Villanelle]

But the income limit for deductibility of a traditional IRA is lower than the income limit for a direct Roth contribution.

It's lower if you're covered by a retirement plan at work, it's the same if you're not covered but your spouse is, there's no limit if neither are covered

DH has a 403b, and I have nothing, so it sounds like our trad income limit is the same as the Roth limit, for both of us.  Is that correct?

No, IRA's are individual accounts, so look at them at the individual level. You husband has a 403(b) that presumably he or his employer contributes, hence he is covered by a retirement plan at work and is therefore subject to that IRA limit (lower than Roth contribution limits). You are not covered by a retirement plan at work, but your spouse is, so you're subject to that limit (equal to Roth contribution limits).

Ah, that makes more sense.  The wording of the previous made it seem like it was combined, which is why I was confused.  And the MFJ income limit includes both party's incomes, which seems like a weird muddying of the waters for individual accounts, so I thought maybe it was the same muddying (and it still kind of is, I guess, since his employer plan means I have a limit, where I wouldn't if he didn't have one.) 

[rab-bit]

It's based on MAGA...

@Villanelle, I know that you meant MAGI, but this made me laugh. Freudian slip? I'm surprised no one else noticed.

[Villanelle]

It's based on MAGA...

I know that you meant MAGI, but this made me laugh. Freudian slip? I'm surprised no one else noticed.

Ha!  IDK if I typed "MAGA" or that's an autocorrect.

[terran]

Ah, that makes more sense.  The wording of the previous made it seem like it was combined, which is why I was confused.  And the MFJ income limit includes both party's incomes, which seems like a weird muddying of the waters for individual accounts, so I thought maybe it was the same muddying (and it still kind of is, I guess, since his employer plan means I have a limit, where I wouldn't if he didn't have one.)

True, although the limits are also higher for MFJ, so it kind of still works out.