Author Topic: Already contributed to Roth. Projected MAGI looks to be over $114k limit.  (Read 4860 times)

robbiejd

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I recently opened a Roth IRA with Vanguard and contributed $5500 for 2014.  I have been doing some freelance work in addition to my regular salary and it looks like I'm on target to exceed the $114,000 MAGI (good problem to have).  I have already received reinvested dividends and the balance is now $5600.

Is it too late to backdoor this contribution to avoid tax penalties?  I already opened a traditional non deductible IRA with Vanguard in hopes that I can transfer my Roth balance to the traditional IRA then back into the Roth.

What steps must I take to mitigate any additional taxation?

Thank you!


Cheddar Stacker

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Open another account to reduce magi. Solo 401k, sep ira, simple ira. Talk to vanguard and they should be able to let you know your options. Take the freelance income as an opportunity to stache more away.

mlipps

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You just need to have Vanguard "recharacterize" your contribution, then do a backdoor Roth. You can probably find more detailed instructions out at Bogleheads, but my understanding is that it should be pretty straightforward.

Joel

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Is there any way to reduce your magi? Have you already maxed out all possible reductions to taxable income?

robbiejd

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Is there any way to reduce your magi? Have you already maxed out all possible reductions to taxable income?

Currently my 401K is maxed out. 

I'm naive as to other possible reductions.  I'm 27, non-married, and no kids.  What are my options?

Thanks

Cheddar Stacker

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Is there any way to reduce your magi? Have you already maxed out all possible reductions to taxable income?

Currently my 401K is maxed out. 

I'm naive as to other possible reductions.  I'm 27, non-married, and no kids.  What are my options?

Thanks

There are many. You mentioned having freelance work. How is that paid? Are you an employee or self-employed? Do you get a paycheck that has withholdings, or just a check from the company?

If you just get a check you are self-employed. You get to deduct many expenses against that earned income. In addition, you can open another account like I mentioned above: Solo 401k, sep ira, simple ira. They are all different, but they all allow you to reduce your MAGI which could potentially get you under the Roth limits. Vanguard can help you with the other types of accounts, but you have to figure out the business deductions. If you don't have a CPA you either need to find a good one or start reading up on tax laws.

If you are an employee at the freelance place you won't have as many options.

You never mentioned a 401K. Do you have one? Are you maxing it out as well?

robbiejd

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Thanks Cheddar!

I'm a full time salaried employee with an unrelated self employed LLC.   I've maxed out my employer 401k.  I switched jobs this year for a higher paying one and also got paid out for a ton of vacation time so my year end wages will likely exceed 114k even with my 401 maxed out. 

The income my LLC generates is from selling my services and collecting payment via processing companies like PayPal. I'm familiar with business deductions and want to make sure I can shelter as much of my income as possible this year even after those business deductions. 


Cheddar Stacker

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Thanks Cheddar!

I'm a full time salaried employee with an unrelated self employed LLC.   I've maxed out my employer 401k.  I switched jobs this year for a higher paying one and also got paid out for a ton of vacation time so my year end wages will likely exceed 114k even with my 401 maxed out. 

The income my LLC generates is from selling my services and collecting payment via processing companies like PayPal. I'm familiar with business deductions and want to make sure I can shelter as much of my income as possible this year even after those business deductions.

Ok, a couple of points then.

1) You can also do a SEP IRA, you likely can't do a solo 401K or SIMPLE IRA in addition to your work 401K but someone else may have more knowledge there. SEP IRA allows a contribution of roughly 20% of your SE profit.

2) You might pay in too much FICA tax this year. You'll get it back so don't worry, but I'm letting you know so you can plan accordingly. SocSec tax is limited to $117K for each employee at each employer (They must withhold it and pay both the ER and EE half). However, the employee is limited to $117K total ($117 * 6.2% = 7,254). Anything you pay in excess of that amount will go on your 1040 as excess FICA tax paid, and it counts just like your federal withholdings would. Make sure you track this and factor it into the amount you are paying in as W/H and Quarterly Estimates. Also, you are all paid up for SocSec so your SE Tax from the LLC should only be the 1.45% Medicare, ER and EE portions.

DeepEllumStache

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Do you have a high-deductible health plan and qualify for an HSA?  I used that strategy a couple of years ago when an unexpected bonus popped me just over the limit.  2014's contribution limit is $3,300 for a single person.

Fatmouse

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I did this last year by accident. The account is with TD Ameritrade.  They had a one page form, which I submitted with instructions to move the assets [those purchased with the excess contribution or with dividends from that contribution] into a regular taxable investment account.  No sale, no fees, no bad tax consequences (just avoiding penalties for over-contributing, which was the point.)

The only caveat is that I had to get the excess contribution out of the IRA before I filed taxes for that year.  (In my case, I over-contributed in 2013, removed the excess in January 2014, filed taxes as normal after that, and all was well.)

I was not educated enough at the time to know that there even was an income max for utilizing a Roth, not to mention the possibility of reducing MAGI.  So much I have learned on these forums in such a short time!
« Last Edit: July 07, 2014, 09:44:45 PM by Fatmouse »

Sunflower

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Do you have a high-deductible health plan and qualify for an HSA?  I used that strategy a couple of years ago when an unexpected bonus popped me just over the limit.  2014's contribution limit is $3,300 for a single person.

Even if you don't currently have one, you might be able to switch if there's an open enrollment in the fall.

robbiejd

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Do you have a high-deductible health plan and qualify for an HSA?  I used that strategy a couple of years ago when an unexpected bonus popped me just over the limit.  2014's contribution limit is $3,300 for a single person.

I would need to wait until open enrollment to switch over to an HSA :(

Definitely going with HSA in the future.


foobar

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1) you can definitely do a solo 401(k) or a SEP-IRA along with another employer 401(k).  With a SEP your contributions limits are 52k as a combo of SEP-IRA and 401(k) contributions. With a 401(k) the limits are 52k per plan (employee+employer half) and 17.5k from the employee across all plans. There are also limits on the percentage of compensation of 20-25% of eligible self employment income. The companies do need to be independant however (i.e. if you are the head of 3 consulting companies, don't try to max out 3 different 401(k)s with employer contributions).


Thanks Cheddar!

I'm a full time salaried employee with an unrelated self employed LLC.   I've maxed out my employer 401k.  I switched jobs this year for a higher paying one and also got paid out for a ton of vacation time so my year end wages will likely exceed 114k even with my 401 maxed out. 

The income my LLC generates is from selling my services and collecting payment via processing companies like PayPal. I'm familiar with business deductions and want to make sure I can shelter as much of my income as possible this year even after those business deductions.

Ok, a couple of points then.

1) You can also do a SEP IRA, you likely can't do a solo 401K or SIMPLE IRA in addition to your work 401K but someone else may have more knowledge there. SEP IRA allows a contribution of roughly 20% of your SE profit.

2) You might pay in too much FICA tax this year. You'll get it back so don't worry, but I'm letting you know so you can plan accordingly. SocSec tax is limited to $117K for each employee at each employer (They must withhold it and pay both the ER and EE half). However, the employee is limited to $117K total ($117 * 6.2% = 7,254). Anything you pay in excess of that amount will go on your 1040 as excess FICA tax paid, and it counts just like your federal withholdings would. Make sure you track this and factor it into the amount you are paying in as W/H and Quarterly Estimates. Also, you are all paid up for SocSec so your SE Tax from the LLC should only be the 1.45% Medicare, ER and EE portions.