Author Topic: Opening an IRA contribution if over income limits  (Read 1611 times)

jo552006

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Opening an IRA contribution if over income limits
« on: December 19, 2018, 08:18:38 AM »
If you are over the income limits (because of an employer sponsored plan) for a traditional IRA deduction, can you still open an account and just not deduct that money?  I know there is a tax on "excess contributions" and just don't want to end up paying a "stupid" tax if i'm not eligible to open the account.

Basically, I wanted to open a traditional IRA with $100 and I sent in all the paperwork, which will be done processing soon.  My tax person just told me that if I am over the income limits (because I have an employer 401k) I can't even open an IRA because it is a prohibited transaction.  I immediately called the investment house but they said that I COULD open and contribute to an IRA, I just couldn't deduct that amount.

Is the investment house correct?  After looking into the IRS.gov stuff on this, I tend to think they are and was going to let my paperwork process through.

bacchi

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Re: Opening an IRA contribution if over income limits
« Reply #1 on: December 19, 2018, 08:37:41 AM »
Why didn't you open a Roth IRA instead? Are you outside the limit for that, too?


You can make non-deductible tIRA contributions. You'll need to fill out form 8606.

Keep your paperwork. You'll need it in the future when you either withdraw money or do a Roth conversion.

jo552006

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Re: Opening an IRA contribution if over income limits
« Reply #2 on: December 19, 2018, 08:44:02 AM »
I simply didn't realize there were income limits on traditional IRA.  I had sent in all the paperwork, and just don't want to deal with the hassle of changing it.  I think I'm going to anyway though, with special forms I need to keep forever.  Not worth it for $100 and a few minutes of my time to change it.


terran

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Re: Opening an IRA contribution if over income limits
« Reply #3 on: December 19, 2018, 09:44:51 AM »
Your tax person is rightish, but ultimately confused. The IRA custodian is correct. There is no income limit to open or contribute to an IRA, you simply can't deduct the contributions to the IRA if you're over certain income limits which makes contributing rather pointless (worse than investing in a regular taxable brokerage account) unless you're going to contribute as the first step to making a backdoor Roth IRA contribution which is only necessary if you're over the income limits for making direct Roth contributions.

If you've opened, but not funded the IRA just don't fund it and open and fund a Roth IRA instead. If you have funded the IRA you'll just need to call the IRA custodian any time before your tax filing deadline and ask them to recharacterize the IRA contribution to a Roth IRA contribution. They'll move all of the contribution including any gains/losses to a Roth IRA. This makes it as if you had contributed to the Roth in the first place. Note that this is different from a conversion from IRA to Roth IRA (as you would do in a backdoor Roth contribution) which can be a taxable event (gains are taxed), so make sure you use the words "recharacterize my contribution from IRA to Roth IRA" with you custodian.

When you recharacterize a contribution (either IRA to Roth IRA or Roth IRA to IRA) you need to attach a statement to your taxes explaining what you've done so the IRS doesn't get confused when the various forms your custodian will send don't match up. Given your tax preparer's confusion about the IRA I'd be a little concerned they wouldn't know about this, so just make sure they do it. It's possible you don't need to attach a statement if you complete the recharacterization in the same year as the contribution as I've only done it in the first few month few months of the following year (before the tax filing deadline of the year in which I made the contribution).

bacchi

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Re: Opening an IRA contribution if over income limits
« Reply #4 on: December 19, 2018, 11:06:42 AM »
I simply didn't realize there were income limits on traditional IRA.  I had sent in all the paperwork, and just don't want to deal with the hassle of changing it.  I think I'm going to anyway though, with special forms I need to keep forever.  Not worth it for $100 and a few minutes of my time to change it.

I would definitely recharacterize it to a Roth as terran suggested. Dealing with non-deductible tIRA contributions is a PITA in later years. It's much easier to deal with only pre-tax money in your tIRA.

jo552006

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Re: Opening an IRA contribution if over income limits
« Reply #5 on: December 29, 2018, 10:07:06 PM »
Thanks for all the help!

My stuff hadn't yet processed so I just called and had it moved into a settlement fund.

I suspect that I was not fully understanding my tax person (or they didn't fully understand me) or they just don't deal with this situation much.  I really find them knowledgeable, and have even sent people their way.

 

Wow, a phone plan for fifteen bucks!