Traditional IRA phase out - how do most people realistically deal with this?

[FrugalFisherman10]

I've become aware in the last year of the phase out of the deductibility of my Traditional IRA contributions. I am wondering how most people approach this each year.

How are you supposed to know how much you can contribute to a traditional IRA in the year and still be able to deduct it, when the year hasn't happened yet? I know there are calculators out there, but that's just an estimate...say you get to the end of the year and your income/expenses were different than expected, and now you've got to settle up.I don't even have that variable of income, and I think this sounds like a tough/annoying situation.

Say I estimate in early 2019 that I will be able to deduct $4500 of the allowable $6000 contribution in 2019. So I set up my Vanguard monthly reoccuring contributions to equal $4,500.
- If I end the year and start doing my taxes and find out I could have contributed more, no problem, I can just do it before April 15th, assuming I didn't set up the remainder of $1500 to have contributed to my Roth IRA already.
- But what if I determine I've already contributed too much, and my deductible contribution was phased out more than I anticipated, due to a higher bonus or more deductible expenses or something?

Would most people just leave it in there as a non-deductible contribution to a Traditional IRA?

What are the factors I should consider in doing so each year?

Would it be easier to just wait till it's all said and done each year before contributing at all (and miss out on potential stock market gains in the meantime)?

or just to contribute the IRA max each year and keep track of what amounts were deductible (that I will have to later pay taxes on)?

[dandarc]

You have until your tax-filing deadline, with extension to recharacterize your IRA contributions between Traditional and Roth if you need to.

Recharacterize - careful with the language when you call your broker.

[secondcor521]

There are two things that seem reasonable:

1.  Recharacterize between your traditional and Roth as appropriate.  So you could contribute the whole $6K to Roth then recharacterize the appropriate fraction to traditional, or vice versa.

2.  Withdraw excess contributions (plus earnings) as needed.  This is less beneficial than recharacterization, but if you decide you didn't want to contribute as much as you did, then you can withdraw the excess plus earnings before 4/15 and it works out OK.  (you'll have to pay income taxes on the earnings plus a 10% penalty on the earnings only if you are under 59.5).

I'd do either of the above before doing a non-deductible IRA; n-d IRA's are pretty much worthless in my opinion.

Of course, you could wait to do your contributions until you know your income tax situation.  That's simpler but you miss out on earnings.

[seattlecyclone]

If I expected I might be in the phaseout range I'd probably just wait until I finish my taxes in the spring to make a contribution. Seems less complicated than messing around with a recharacterization.

[FrugalFisherman10]

Thank you all for the info!

[Laserjet3051]

If I expected I might be in the phaseout range I'd probably just wait until I finish my taxes in the spring to make a contribution. Seems less complicated than messing around with a recharacterization.

And miss out on as much as 18 months of growth? No way. Make the full contribution in January of the tax year. Recharacterize a portion of in the phaseout range when the time comes. Recharacterization is easy if your custodian calculates the earnings (most major brokerages do). Fill in the form, upload it to the custodian. Bingo, done.

[seattlecyclone]

If I expected I might be in the phaseout range I'd probably just wait until I finish my taxes in the spring to make a contribution. Seems less complicated than messing around with a recharacterization.

And miss out on as much as 18 months of growth? No way. Make the full contribution in January of the tax year. Recharacterize a portion of in the phaseout range when the time comes. Recharacterization is easy if your custodian calculates the earnings (most major brokerages do). Fill in the form, upload it to the custodian. Bingo, done.

I never suggested I'd leave the money uninvested in a savings account all that time. No way! I'd make a contribution to my taxable account early this year and a contribution to my IRA early next year rather than vice versa. A few thousand dollars invested a few extra months in a taxable account rather than an IRA is slightly suboptimal, but what's the real cost of this? Maybe you get taxed on a few dollars of dividends now rather than in retirement? No big deal. I'd rather pay that than sit on hold with Vanguard to get the recharacterization done. Others who dislike phone calls less than me might have a different opinion, and that's okay!