Author Topic: Max Roth if I exceed the income limit?  (Read 3161 times)

Spondulix

  • Pencil Stache
  • ****
  • Posts: 640
  • Age: 39
  • Location: Los Angeles, CA
Max Roth if I exceed the income limit?
« on: March 27, 2015, 12:22:25 AM »
I might hit the max income to make a Roth contribution (won't know til later in the year). As far as I understand, if you make a contribution and go over the income limit, you can still take out the contribution and not be penalized. If I max out my Roth now, does that mean I get to keep the interest in there that it earned (in the meantime)?

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Max Roth if I exceed the income limit?
« Reply #1 on: March 27, 2015, 01:05:26 AM »
You can always backdoor it if you get above the limit.

http://www.milesdividendmd.com/the-back-door/

patricles

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Max Roth if I exceed the income limit?
« Reply #2 on: March 27, 2015, 07:31:37 AM »
Backdoor Roth might be a good idea to do just to play it safe, I don't know how your scenario would play out otherwise.  I've never done a backdoor Roth myself but I believe it's a fairly easy process.

zurich78

  • Stubble
  • **
  • Posts: 180
Re: Max Roth if I exceed the income limit?
« Reply #3 on: March 27, 2015, 08:17:53 AM »
Backdoor Roth IRA is very easy.  I do it every year.  You make a contribution (non-deductible) to your traditional IRA.  Wait a few days.

Then, most of the major financial companies (Vanguard, Fidelity, etc) have an option on the website where you can "Convert to Roth IRA".  Select that and you're all set.

The one caveat, is that you should not do this if you have a sizable balance in ANY traditional IRA account.  If you do, then you'll be hit with pro rata taxation on the conversion.

The only way to avoid that, is to roll all of your tIRA funds in to a 401K.  So bottom line, if you carry no balance in your traditional IRA accounts (all of them, regardless of institution) you can just do the conversion no problem.  If you do, then you need to make sure that money is rolled in to a 401K so that your traditional IRAs are empty.

caseyzee

  • 5 O'Clock Shadow
  • *
  • Posts: 99
Re: Max Roth if I exceed the income limit?
« Reply #4 on: March 27, 2015, 08:39:45 AM »
I went over the limit in 2014.  Discovered it when I did my taxes, of course.  Had the excess contributions recharacterized as 2015 contributions.

I have not done a back door Roth because I have a large rollover 401k/IRA.

It was a difficult process to fix it, but I still chose to cut short my 2015 contributions this year to avoid having to recharacterize next year just because it just seems easier to make up the difference when I determine my AGI next year.


forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: Max Roth if I exceed the income limit?
« Reply #5 on: March 27, 2015, 08:52:07 AM »
I think you do have to pull out any earnings on excess contributions as well as the excess contributions. Although, the guidance isn't explicit on that point.

https://investor.vanguard.com/ira/excess-contribution
http://www.irs.gov/publications/p590/ch02.html

Spondulix

  • Pencil Stache
  • ****
  • Posts: 640
  • Age: 39
  • Location: Los Angeles, CA
Re: Max Roth if I exceed the income limit?
« Reply #6 on: March 27, 2015, 03:15:43 PM »
I think I've always misunderstood how a backdoor Roth works!

I have a SEP IRA, Roth, and 401k. No traditional. Can you backdoor contribute multiple times in a year? Or just once?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4813
  • Age: 34
  • Location: Seattle, WA
Re: Max Roth if I exceed the income limit?
« Reply #7 on: March 27, 2015, 03:35:42 PM »
I think I've always misunderstood how a backdoor Roth works!

I have a SEP IRA, Roth, and 401k. No traditional. Can you backdoor contribute multiple times in a year? Or just once?

Bogleheads indicates that pre-tax SEP IRA balances can be an issue for backdoor contributions.

A few years ago I was in the phase-out range for Roth IRA contributions. I made a contribution and it turned out when I did my taxes that the contribution was higher than otherwise allowed. It was easy enough to withdraw the excess contribution. I had to call up my IRA provider and fill out a form. My account value had gone up since I had made the excess contribution, so the withdrawal had a few dollars of earnings attached, which (unlike the contribution itself) is subject to taxes and a 10% early withdrawal penalty. Filling out the tax forms to report this was more of a pain than the actual monetary amount involved.

Spondulix

  • Pencil Stache
  • ****
  • Posts: 640
  • Age: 39
  • Location: Los Angeles, CA
Re: Max Roth if I exceed the income limit?
« Reply #8 on: March 27, 2015, 07:59:54 PM »
I just read that I can roll my SEP into my 401k (if my 401k plan allows it, which I think it does.) I'm trying to figure out if I could do a backdoor contribution after that.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Max Roth if I exceed the income limit?
« Reply #9 on: March 28, 2015, 06:51:04 PM »
You absolutely can. As long as you (Or your spouse) have no IRA accounts open, the pro rata rule will not affect you.