Roth IRA - MAGI Limit Question

[Whiskers]

My income is somewhat unpredictable. As has been the case for the last several years, my wife and I have been dutifully contributing to our respective Roth IRAs on a monthly basis -- targeting a max date in December. However, unlike other years, it looks like we might run afoul of the income limits permissible to qualify for Roths this year (for married: phase-out starts at $184,000; ineligible at $194,000). I guess it is a good problem to have. Our 401ks should be maxed by years end as well. There are no other tax deferred instruments available to us through our employers.

My question is, should our MAGI be above $184k at year's end, what do we do? What if over $194k (less likely)? Do I have to take funds out of the Roths and put them in TIRAs? How do I do this? My preference is Roth accounts because I like the certainty (I realize nothing is completely certainty) of the tax-free account.

Any advice would be appreciated.

Thanks

[zombiehunter]

Note that I am not an accountant and this is not tax advice.  But if I were you...

If you are above $184k and below $194k, you calculate the amount you are eligible to contribute. 

Any amounts above the limit, whether income is above $194k or above the allowable amount if between $184-194k, must be withdrawn (including any earnings on those contributions).  I believe this would be a major pain to determine, especially since you are contributing over time instead of in one amount.

If you do not qualify for a Roth due to income limits, you will probably want to move it to a taxable account rather than a traditional IRA (are you eligible for a traditional IRA if you both have 401ks? I would not think so given 401ks and income). 

I would stop contributing to the ROTH now.  Once you know exactly how much MAGI you will have for 2016, you can add more if needed (or back out what is needed).  You have until April 2017 so there is no rush at year end.  This is the same deadline for withdrawing the excess contribution.

https://www.taxact.com/support/1280/ira-or-roth-ira---excess-contributions/

[Whiskers]

Thanks zombiehunter...

Maybe what I'll do is continue with contributions to the Roth accounts but leave the money uninvested so that it can easily be extracted early next year without the pain of determining earnings /losses. I'm not really sure whether I am eligible for a Trad IRA in light of us both having 401ks and not sure how I would revert the funds to pre-tax to do so (or whether that is something accounted for at filing). It seems that a taxable account is probably the best option because then I'd be looking at just the capital gains rate down the road...

[Whiskers]

So the chickens have come home to roost. I ended up maxing out the 401k and the Roth IRA. Just did the taxes. As anticipated, my MAGI pushed  me into the income limits as it pertains to the Roth contributions. Turns out, I'll have to pull $3,580 out. Should I put that cash into a Traditional IRA? Or, since there would be no tax deduction (with consideration of already having the 401k maxed), does it make more sense to stick in a taxable account? Thoughts?

[Whiskers]

Or... do I put the cash into a Trad IRA and then backdoor the funds back into a Roth?

[Apocalyptica602]

This exact situation happened to me. My income is not very unpredictable but our MAGI did end up in that phase out range.

I called Vanguard and they recommended I 'reclassify' some portion of my Roth IRA contributions to traditional IRA. Obviously if your income is high enough to hit the Roth phaseout you won't be able to deduct traditional IRA contributions. (most people can't do that anyway because they participate in a work plan.

The other option presented was straight up withdrawing the contribution, however you still need to compensate for the earnings / losses and adjust your taxes.

I don't believe you can reclassify directly into a taxable account. I could be wrong, but they'll probably say withdraw, pay the gains / deduct the losses, and then do with the money as you please (i.e. drop it in your taxable account).

Going forward I'm probably going to stop my Roth contributions in lieu of a taxable account, and then shore up my Roth IRA after I do my taxes in February the following year.

[NathanP]

For next year you should avoid making Roth contributions until you have completed your taxes. Once you know your AGI, you can compute the exact amount that you can contribute to your IRA. Remember that you have until April to make previous year IRA contributions.

When my income was lower, I would fall somewhere in the phaseout range for the traditional IRA. I waited until tax time to divvy up my contributions between the traditional and Roth.

[MDM]

Or... do I put the cash into a Trad IRA and then backdoor the funds back into a Roth?

Yes.

See IRA recharacterization - Bogleheads and Backdoor Roth IRA - Bogleheads.

[aspiringnomad]

I'm in the same situation this year. I plan to wait until I do my taxes next year, then contribute if I'm eligible.

[MustacheAndaHalf]

Just to provide the income limits for your situation:
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Above $120k (married/jointly, and you have a 401(k) plan at work) you do not get a tax deduction benefit from your Traditional IRA contributions.  You could still make a non-deductible contribution to a Traditional IRA.  If later you convert it to a Roth IRA, that money grows tax free after that.

In theory, the IRS could apply the step doctrine to this situation.  You can't contribute to a Roth IRA, but you take two steps to achieve the result of a Roth IRA.  But there is no money in this for the IRS: it's always $5,500 after-tax amounts anyways.  If they reverse it, you keep the $5,500.  Plus, a non-deductible IRA defers paying of taxes - and when the intermediate step offers you a benefit, the IRS step doctrine doesn't apply.  I mostly mention it hoping some day it will come up, and someone can say what happened with the IRS.

I'd suggest you wait for one statement with the (non-deductible) Traditional IRA, then convert to a Roth IRA.

[MDM]

In theory, the IRS could apply the step doctrine to this situation.  ...
I'd suggest you wait for one statement with the (non-deductible) Traditional IRA, then convert to a Roth IRA.

Most likely there is no need to worry about timing for the backdoor Roth, particularly in light of the recent More support for backdoor Roth? [Roth IRA Decision reversing Tax Court] - Bogleheads.org.  Just depends on how many nines one wants to be 99.99...% sure.

[Aggie1999]

For next year you should avoid making Roth contributions until you have completed your taxes. Once you know your AGI, you can compute the exact amount that you can contribute to your IRA. Remember that you have until April to make previous year IRA contributions.

When my income was lower, I would fall somewhere in the phaseout range for the traditional IRA. I waited until tax time to divvy up my contributions between the traditional and Roth.

Not sure if I agree with this. While it makes tax time simpler, your missing out on growth for a year+. Better IMO is if you think you are going to be close to the ROTH phase out or contribution limit put the year's contribution in a separate ROTH account. Then if you need to convert it to a traditional IRA the growth is obvious. Someone correct me if I've got something wrong with this as that is what I am doing for 2017.

[MDM]

Better IMO is if you think you are going to be close to the ROTH phase out or contribution limit put the year's contribution in a separate ROTH account. Then if you need to convert it to a traditional IRA the growth is obvious. Someone correct me if I've got something wrong with this as that is what I am doing for 2017.

That is reasonable.  See the IRA recharacterization link in a previous post.