Author Topic: Simple (silly?) Roth IRA questions  (Read 850 times)

anni

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Simple (silly?) Roth IRA questions
« on: January 24, 2022, 10:50:02 AM »
2021: I contributed the $6k max to my Roth IRA in Jan or Feb. In October I thought I might need the cash, withdrew the $6k just in case. Left the gains alone. Ended up not needing the cash. Can I just put the $6k back now before April 15? It's all within the 2021 tax year so I had hoped yes. I know about the 60-day rule for "borrowing" but not sure if it counts if it's all money for one tax year.

2022: I might be unexpectedly over the income limit for Roth IRA, after a job change, but I'm not sure until bonuses go out in Feb. I already funded my IRA. From what I can tell, I am still allowed to just take out the excess contributions before the end of the tax year if I have to. But... I get to keep any gains tax-free? (assuming it goes up and not down...) ...and if it goes down... do I just have to take out the same number of shares as what I purchased? I use VLXVX for my Roth.

dandarc

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Re: Simple (silly?) Roth IRA questions
« Reply #1 on: January 24, 2022, 10:58:03 AM »
I don't know on your 2021 question, but for 2022 - if you timely remove excess contributions, your broker will return the original contribution with associated earnings (or losses).

Edit: I'm actually unsure of the tax-treatment - removing the excess contributions in a timely fashion avoids excise tax, but I'm not sure if you pay tax only or tax plus penalty on any earnings.

Do you have any traditional IRA balances? If not, a backdoor Roth might be a workable option (under current law - at one time last year, a proposed law would have killed the backdoor Roth, but nothing passed).

Another edit: If tax on any earnings is unpalatable to you, you can do the recharacterize to non-deductible traditional IRA part regardless, but the conversion part doesn't work so well if you have a significant tIRA balance when you start.
« Last Edit: January 24, 2022, 11:05:52 AM by dandarc »

secondcor521

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Re: Simple (silly?) Roth IRA questions
« Reply #2 on: January 24, 2022, 11:41:43 AM »
2021: I contributed the $6k max to my Roth IRA in Jan or Feb. In October I thought I might need the cash, withdrew the $6k just in case. Left the gains alone. Ended up not needing the cash. Can I just put the $6k back now before April 15? It's all within the 2021 tax year so I had hoped yes. I know about the 60-day rule for "borrowing" but not sure if it counts if it's all money for one tax year.

When you say you withdrew the $6K, I am interpreting that as a regular withdrawal from your Roth account.

If that interpretation is accurate, then:

(A) The $6K withdrawal is considered a distribution from your Roth account.  It will be deemed by the IRS as coming from your Roth contributions earliest to most recent (so from ... 2014, 2015, 2016, 2017, ... 2021).

(B) You'll need to complete IRS Form 8606 part III and submit it with your 2021 tax return.  You should end up with a zero on line 23.

(C) You can't treat it as a rollover, because if you withdrew the money in October then you have already missed the 60 day window.

2022: I might be unexpectedly over the income limit for Roth IRA, after a job change, but I'm not sure until bonuses go out in Feb. I already funded my IRA. From what I can tell, I am still allowed to just take out the excess contributions before the end of the tax year if I have to. But... I get to keep any gains tax-free? (assuming it goes up and not down...) ...and if it goes down... do I just have to take out the same number of shares as what I purchased? I use VLXVX for my Roth.

Yes, you can (and probably should) take out excess contributions.  No, you do not get to keep any gains tax free.

If you do so, then when you do so your IRA custodian will take out the excess contribution plus applicable earnings.  So you may have put in $6,000 but your IRA custodian may give you back $6,100.  In this case the $100 will need to be included in your 2022 taxable income and if you are under age 59.5 you will owe a 10% early withdrawal penalty on that $100 also.

If it loses money, then the IRA custodian will take out the excess contributions minus those losses.  So you may have put in $6,000 but your IRA custodian may give you back $5,800.  In this case the good news is you won't have to include any earnings or pay any penalties, but the bad news is that the $200 loss is not deductible on your tax return anywhere (unless you completely close out your Roth IRA, which is unlikely, and even then I think it's only a Schedule A itemized deduction so probably not going to do you any good anyway).

If you just leave the contribution in the account, then you will pay a 6% excise tax every year the excess contribution remains in the IRA.

See Pub 590-A for more details.
« Last Edit: January 24, 2022, 11:44:41 AM by secondcor521 »

anni

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Re: Simple (silly?) Roth IRA questions
« Reply #3 on: January 24, 2022, 12:25:03 PM »
@secondcor521
Thank you, very helpful! Only caveat... I only just started contributing to the Roth IRA in 2021, so I didn't know if it still counted as a distribution. Sadly missed out on prior years of contributing and I guess last year might have been my last one for a while.

And thanks for the other tax advice! I'm getting an actual person's help on my 2021 taxes this year for the first time, thankfully.

@dandarc No trad IRA, as I am over the income limit from what I understand. Looking to see if my employer allows for an after-tax 401k like the one linked in the Investment Order thread, but I might have to stick to a plain old after-tax brokerage account.

dandarc

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Re: Simple (silly?) Roth IRA questions
« Reply #4 on: January 24, 2022, 12:31:41 PM »
@secondcor521
Thank you, very helpful! Only caveat... I only just started contributing to the Roth IRA in 2021, so I didn't know if it still counted as a distribution. Sadly missed out on prior years of contributing and I guess last year might have been my last one for a while.

And thanks for the other tax advice! I'm getting an actual person's help on my 2021 taxes this year for the first time, thankfully.

@dandarc No trad IRA, as I am over the income limit from what I understand. Looking to see if my employer allows for an after-tax 401k like the one linked in the Investment Order thread, but I might have to stick to a plain old after-tax brokerage account.

Since you do not currently have any outstanding traditional IRA balances, you could recharacterize your 2022 contribution from Roth to Traditional, and then immediately convert the traditional IRA to Roth IRA - that's the "backdoor Roth" technique, of the 'I contributed to Roth in the first place' variety. The method involving your 401k is called "mega-backdoor Roth". Both allowed currently by law.

As mentioned both were also clearly targeted in early versions of the BBB law last year, so that could be an indicator that the Roth-regardless-of-income party will be over soon. Or not - congress is pretty fickle when it comes to raising taxes and exactly how.

secondcor521

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Re: Simple (silly?) Roth IRA questions
« Reply #5 on: January 24, 2022, 04:40:41 PM »
@secondcor521
Thank you, very helpful! Only caveat... I only just started contributing to the Roth IRA in 2021, so I didn't know if it still counted as a distribution. Sadly missed out on prior years of contributing and I guess last year might have been my last one for a while.

Right.  Then yes, the withdrawal you took in October will count against your $6K contribution that you made in early 2021, so on Form 8606 you'll probably put $6K on lines 19, 21, and 22.  No taxes or penalties on that distribution, and what is left in there will grow tax free (even if it's small), but it does mean you can't make any more contributions for 2021.

Also note that if you do the backdoor Roth process as @dandarc suggests, then you'll have to fill out Part I and Part II of Form 8606 for that tax year.