Author Topic: No Longer Qualify for ROTH IRA Income Limit--Cash it Out?  (Read 343 times)

revisednut

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No Longer Qualify for ROTH IRA Income Limit--Cash it Out?
« on: July 08, 2020, 08:13:40 PM »
I hope all is well in the MMM forums--been a while since I posted, but always lurking!

Question for the retirement, tax, and strategic pros here.

I have about $40k in a ROTH IRA that I started in 2013.  I've been maxing it out every year, so if you do the math, the returns haven't been great.  It was opened up through a Dave Ramsey ELP, which has quite high fees, and not the greatest invesments.

I'm in the midst of a large shift in my current job, which will increase my income well above the MAGI single limit of $139,000 to qualify (also under 50).  This bump was not expected, so I have some questions:
1) I've already put $3,000 in the year (with another $500 coming out in 2 weeks)--should I stop all contributions immediately?
2) What will this cost me at tax time?
3) I was looking to leverage about $50,000 for a real estate investment--was going to borrower it from my traditional 401k, but should I just withdrawal the funds from the ROTH IRA and close the account?
4) If I withdawal the funds, can I take it all out tax & penalty free, or is it just the contributions?  Not that it matters, as there hasn't been much growth anyway.

It's important to note I likely won't fall below the ROTH IRA contribution level in at least the next several years.  I have enough other investments that taking this out won't materially change my long-term FIRE/retirement plan.

Any other tips for me?

Thanks in advance!

fell-like-rain

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Re: No Longer Qualify for ROTH IRA Income Limit--Cash it Out?
« Reply #1 on: July 08, 2020, 08:32:42 PM »
1. Yeah, definitely stop contributing if your MAGI will be over the limit.
2. I believe it’s a 6% tax per annum on anything you’ve contributed over the limit. But to my knowledge, if you withdraw now the $3,000 you’ve put in this year, you won’t pay any penalties.
3. This is somewhat of a personal question. Would you rather have the 401(k) loan on your balance sheet, plus the extra assets, or just have it paid for? I think mathematically it’d be a bit better to use the 401k money, because the Roth growth is untaxed.
4. I wouldn’t pull it out, but I would IMMEDIATELY switch providers and get into better funds. If you’re serious that you’ve been maxing it out since 2013, the returns have been atrocious. Napkin math says contributing the max 2013-2019 would be $39,000, plus the $3k you’ve put in, means you’ve somehow lost money on these investments despite the bull market. That a company could offer funds that bad and fees that high is just complete malfeasance.

Dicey

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Re: No Longer Qualify for ROTH IRA Income Limit--Cash it Out?
« Reply #2 on: July 08, 2020, 08:45:02 PM »
4. I wouldn’t pull it out, but I would IMMEDIATELY switch providers and get into better funds. If you’re serious that you’ve been maxing it out since 2013, the returns have been atrocious. Napkin math says contributing the max 2013-2019 would be $39,000, plus the $3k you’ve put in, means you’ve somehow lost money on these investments despite the bull market. That a company could offer funds that bad and fees that high is just complete malfeasance.
As if I could like DR less...argh!

Definitely move the Roth, but don't cash it out. The nature of your income means the tax-free status of a Roth is more valuable than ever. Invest it better and let it ride. I suspect our old friend JL Collins' blog would have some useful low-cost suggestions. https://jlcollinsnh.com/


secondcor521

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Re: No Longer Qualify for ROTH IRA Income Limit--Cash it Out?
« Reply #3 on: July 08, 2020, 09:00:59 PM »
Just because you don't qualify to contribute does not mean that you're required to cash it out.  You can't add any more this year, but you can just keep the account.

You can change investments and custodians if you want to without any tax consequences.

If your income drops again, you may qualify to contribute more in the future.

MDM

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Re: No Longer Qualify for ROTH IRA Income Limit--Cash it Out?
« Reply #4 on: July 08, 2020, 09:17:39 PM »
Might be worth doing a recharacterization to traditional of this year's already-contributed amount, add $3000 more to the traditional IRA, then use the Backdoor Roth process to move it all to your Roth IRA.

Does that look worthwhile to you?