The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: aKrE2WRAJObRJ6TK on March 20, 2019, 05:50:57 PM
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US
Married Filing Jointly
Both spouses ~30yo
2019 Estimated AGI: $178,000
Maxing out HSA (only 1 spouse on HDHP) and both 401(k)s
We already deposited a significant amount of the $6,000/each limit into our Traditional IRAs for 2019. However, I just realized that our MAGI will almost certainly be above the deductible Traditional IRA limit ($123,000) due to a substantial increase in income this year. We are therefore "violating" guideline 4 of https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153 (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) by not contributing to Roth IRAs rather than non-deductible Traditional IRAs since our MAGI will be too high for the latter but not for the former.
What do you recommend we do with the Traditional IRA contributions already made for 2019? Should we try to roll them back since they are non-deductible and move them to Roth IRAs instead? Or is it simpler to do a backdoor Roth IRA from the non-deductible Traditional IRA contributions? Another option?
I made a bad assumption in my head that the income limits were effectively the same between being able to contribute to Roth IRAs and being able to deduct Traditional IRA contributions. It turns out that our income will likely be in the middle-ground where we can contribute to Roth IRAs, but we cannot deduct contributions to Traditional IRAs (making Roth IRAs the best choice this year).
Thanks.
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Recharacterize to Roth.
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Recharacterize to Roth.
+1.
That's the simplest. See IRA recharacterization - Bogleheads (https://www.bogleheads.org/wiki/IRA_recharacterization).
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Thanks!
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Just throwing this out there - if there's any chance you might go over the limit for Roth IRA contributions as well, it would be better to just do a Roth conversion rather than a recharacterization
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Just throwing this out there - if there's any chance you might go over the limit for Roth IRA contributions as well, it would be better to just do a Roth conversion rather than a recharacterization
Not if they have pre-tax money already in a Traditional IRA--the conversion will be pro rated. The back door Roth only works if you have no other pretax dollars in a traditional IRA.
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Just throwing this out there - if there's any chance you might go over the limit for Roth IRA contributions as well, it would be better to just do a Roth conversion rather than a recharacterization
Not if they have pre-tax money already in a Traditional IRA--the conversion will be pro rated. The back door Roth only works if you have no other pretax dollars in a traditional IRA.
Correct - thank you for pointing that out. IF you are set up without any tIRA balances, then it would be better. If not, then just do the recharacterization, and if you end up over the Roth limit as well, you'll have to correct that contribution.
That situation doesn't look likely for the OP based on his numbers, I was more just throwing it out for people in a similar situation who may be higher up on the income scale. I recently rolled my tIRA money into my current 401(k) unlocking the option for myself.
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OP - you mention thinking you were below $123k when you actually had a $178k income. Are you aware $178k is only 8% below where Roth IRAs begin to phase out? Between incomes of $193k to $203k, the allowed Roth IRA contribution falls from $6k to $0.
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Just throwing this out there - if there's any chance you might go over the limit for Roth IRA contributions as well, it would be better to just do a Roth conversion rather than a recharacterization
Not if they have pre-tax money already in a Traditional IRA--the conversion will be pro rated. The back door Roth only works if you have no other pretax dollars in a traditional IRA.
Correct - thank you for pointing that out. IF you are set up without any tIRA balances, then it would be better. If not, then just do the recharacterization, and if you end up over the Roth limit as well, you'll have to correct that contribution.
That situation doesn't look likely for the OP based on his numbers, I was more just throwing it out for people in a similar situation who may be higher up on the income scale. I recently rolled my tIRA money into my current 401(k) unlocking the option for myself.
The chance of us going over the Roth limits this year is pretty low. If anything, we'll end up on the low side of the 178k estimate due to one of our incomes being on temporary (though scheduled through end-of-year) contract and well above market rate and the other expected to drop by a bit mid-year. We have no side-income on the horizon.
Yeah, the money that is already in our tIRAs is post-tax. I manually sent post-tax dollars to the account, expecting (erroneously) to deduct them come tax time.
Thanks!
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OP - you mention thinking you were below $123k when you actually had a $178k income. Are you aware $178k is only 8% below where Roth IRAs begin to phase out? Between incomes of $193k to $203k, the allowed Roth IRA contribution falls from $6k to $0.
Actually, the $123k figure wasn't even on my mind when I made the contributions. We had such an income increase rolling into this year, that I didn't realize we were approaching income limits (a good thing, I just forgot to double check).
But, as I just posted above, I think the 178k is a max for us for this year. So, not too worried about going over Roth limits. But, I'll certainly keep my eyes on that if something changes.
Thanks!
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It doesn't sound like it will be an issue for you this year, but if anyone ever finds they are somewhere near the MAGI limits of whether your traditional IRA contributions are deductible or not, keep in mind that you have until the tax deadline to recharacterize those contributions (unfortunately this does not apply to conversions). So you can wait for the year to close out, then calculate your MAGI with certainty, then decide to recharacterize or not.
I've been in this situation for the past 2 years and have just contributed to the Traditional IRA anyways. Both years, I've ended up recharacterizing them when we realized we surpassed the MAGI limits for deductible contributions