IRA Question - Roth and Income Limits

[69mach351]

I will try to get all of the relevant in formation here as clear as possible...

I have a traditional IRA and a Roth IRA that was a rollover, with Betterment.  I have been contributing to the traditional, because we have been above the income limit that would let me contribute to the Roth. 

This year it appears that we will be below the limit ($185k is the limit IIRC).  If I contribute to the Roth and for some reason we break that cap, what kind of penalties am I in store for?  Am I better off contributing to traditional an back dooring it just to be safe?  If so, what type of taxes/penalties are involved with that (or anything else to watch out for)?

My wife just has a simple IRA (matched) through her company if it makes any difference.

Sorry if this is commonly covered.  I ran a search but that function didn't work for me.

[erutio]

I have been contributing to the traditional, because we have been above the income limit that would let me contribute to the Roth. 

You may need to consult a tax professional on this, but since you mentioned your wife has a retirement plan at work, if your income is too high to contribute to a Roth, then it is also too high to make a deductible contribution to a TIRA.   Unless you have been making non-deductible contributions to the TIRA.

This year it appears that we will be below the limit ($185k is the limit IIRC).

2017 income limit for full contribution for Roth is $186k.

If I contribute to the Roth and for some reason we break that cap, what kind of penalties am I in store for?  Am I better off contributing to traditional an back dooring it just to be safe?  If so, what type of taxes/penalties are involved with that (or anything else to watch out for)?

In general, if you're gonna be close, it'd be smarter to just do the backdoor Roth.  It only adds one simple form to your taxes.  However, you mention having a TIRA also.  If you have pre-tax dollars in the TIRA, your backdoor Roth can still be done, but will incur a taxable event.  You will be taxed on the amount you convert to Roth in a pro-rated fashion, depending on your balances.  Bad idea for most people, as it defeats the purpose of the backdoor.

[69mach351]

Thank you for the information.  I obviously need to get more information.  If what I read is correct, the limit for tax deductible contributions to the traditional IRA is $184k.  Since I am doing it on my own, I am already putting in the dollars after they have been taxed.  I guess the difference would be, if it is something that I am able to deduct, it would have to be done at tax time.

At this point, I will keep contributing to the traditional.  If we stay under the cap, that (in a sense) will be a bonus I guess.

I guess the other side of it, I could start putting money back (savings or taxable account), and dump it into the appropriate retirement account (roth or traditional) at the start of the next year when we know what our total income was. 

If we cannot make tax deductible contributions, what would the point of putting it in an IRA vs a taxed account be?  The gains and dividends wouldn't be taxed?

[Heroes821]

To add to Erutio. If you are a non-working spouse or you are not covered by any retirement plan at work then your tIRA contributions up to the limit are ALWAYS deductible regardless of joint income.

Your wife would be the one that would need to be concerned with if she could also contribute to a roth IRA or a deductible tIRA (if She can't access the roth and your joint income is too high then she can still contribute to a tIRA you just can't deduct it on taxes)

[MDM]

If you are a non-working spouse or you are not covered by any retirement plan at work then your tIRA contributions up to the limit are ALWAYS deductible regardless of joint income.

That statement is not correct.

See https://www.irs.gov/retirement-plans/ira-deduction-limits.  As noted there, "deduction is limited...if your spouse IS covered by a retirement plan."

[Heroes821]

If you are a non-working spouse or you are not covered by any retirement plan at work then your tIRA contributions up to the limit are ALWAYS deductible regardless of joint income.

That statement is not correct.

See https://www.irs.gov/retirement-plans/ira-deduction-limits.  As noted there, "deduction is limited...if your spouse IS covered by a retirement plan."

My understanding even through your link is that the NON-Working spouse as long as their joint income is 11000k they can fund a tIRA in the name of the non-working spouse up to the cap as long as they file jointly.

So I will retract the part about if 1 spouse has work retirement and the other spouse works but has no retirement contributions then they may be limited if I read the MDM link correctly.

[MDM]

If you are a non-working spouse or you are not covered by any retirement plan at work then your tIRA contributions up to the limit are ALWAYS deductible regardless of joint income.

That statement is not correct.

See https://www.irs.gov/retirement-plans/ira-deduction-limits.  As noted there, "deduction is limited...if your spouse IS covered by a retirement plan."

My understanding even through your link is that the NON-Working spouse as long as their joint income is 11000k they can fund a tIRA in the name of the non-working spouse up to the cap as long as they file jointly.

So I will retract the part about if 1 spouse has work retirement and the other spouse works but has no retirement contributions then they may be limited if I read the MDM link correctly.

The difference is between funding vs. deducting a tIRA contribution.

[Heroes821]

If you are a non-working spouse or you are not covered by any retirement plan at work then your tIRA contributions up to the limit are ALWAYS deductible regardless of joint income.

That statement is not correct.

See https://www.irs.gov/retirement-plans/ira-deduction-limits.  As noted there, "deduction is limited...if your spouse IS covered by a retirement plan."

My understanding even through your link is that the NON-Working spouse as long as their joint income is 11000k they can fund a tIRA in the name of the non-working spouse up to the cap as long as they file jointly.

So I will retract the part about if 1 spouse has work retirement and the other spouse works but has no retirement contributions then they may be limited if I read the MDM link correctly.

The difference is between funding vs. deducting a tIRA contribution.

Ah a fine point that I was not considering. You are correct.  and OP was in the correct that thought that the 184k is the right mark.

https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work.

Not to thread highjack, but MDM does the spouse's Simple IRA also reduce MAGI like 401k contributions do?

[MDM]

Not to thread highjack, but MDM does the spouse's Simple IRA also reduce MAGI like 401k contributions do?

Yes.  See Operating a SIMPLE IRA Plan:

W-2 Reporting: SIMPLE IRA contributions are not included in the “Wages, tips, other compensation” box of Form W-2

[mizzourah2006]

You can just recharacterize it with your account provider. No big deal, we do this every year, but the other way. We contribute to our Roth IRAs and then after doing our taxes we find out how much we can deduct from our Traditional IRA and then recharacterize that portion to a traditional IRA and then take that further deduction on our taxes. Yours would just be the same thing at the other end with no further tax deduction.

[bryan995]

We are above the tIRA deduction limits ($111,000) and normally above the rIRA contribution limit ($193,000)

On Jan1, we move $5500 x 2 into both tIRAs, and then immediately convert to rIRAs (via betterment for now)

If it is unclear whether or not one will exceed the rIRA contribution limit, then I don't see anything wrong with simply planning for the backdoor-roth the beginning.  Unless there is some other benefit of a direct contribution over backdoor conversion?