Hate to hijack this thread but I don't want to start a new one for this.
So dh and i maxed out Roths, 6K and 7K for him, but apparently our AGI is like 201K so there seems to be a fee/penalty of about 700. We are both covered under pensions and make too much for the traditional IRA to be deductable. Would it still be a good idea to recharacterize the conributions we made, even if they won't be deductable at least we won't pay the penalty, right?
Also, if you make non-deductable contributions to a traditional IRA, do you still have to pay regular income tax when you take the money out at retirement?
Note that the 6% (?) excess contribution penalty is every year until the excess is removed, so you do need to get it out.
Leaving money in a non-deductible IRA really doesn't make sense. You don't get a deduction for the contribution and then you pay tax on all the gains at ordinary income tax rates. It's the worst of both worlds. You'd be better off investing in taxable where gains are taxed at lower rates.
Do you have previously deducted traditional IRA balances either from contributed when you had lower income or from rollovers from old employer plans into an IRA? If not you should consider making a "backdoor Roth contribution." You'll recharacterize the Roth contribution to traditional, then you'll convert this traditional contribution to Roth. You'll pay taxes on any gains since the contribution, but not on the original contribution amount. You'll need to fill out form 8606. Next year just contribute straight to traditional and convert to Roth.
If you do have previously deducted traditional IRA balances then the backdoor Roth contribution doesn't work because all traditional to Roth conversions are made pro-rata (in proportion) between deducted (which is taxable) and not-deducted (not taxable), so you wouldn't be able to convert the whole non-deductible contribution (unless you convert the whole balance) and you'd pay tax in your current high tax bracket which is the opposite of what you want to do.
If you previously deducted IRA balance is especially low you might still want to do this since it will let you get a lot more money in to Roth in future years, but if the balance is large it's probably a bad unless you get roll your traditional IRA balance into your current employer plan(s). You'll need to check with HR and/or your employer plan administrator to find out if they'll accept a rollover from an IRA. If your IRA balance is all from a rollover from a previous employer plan make sure you tell them that as some plans will accept rollovers from a rollover IRA, but not from an IRA to which direct contributions have been made. Make sure you find out about this rollover before recharacterizing the Roth contributions as it may be more difficult or impossible to separate out the previously deducted balances from the recharacterized balance and you don't wan the recharacterized balance rolled over in to your workplace plan. As long as you have a $0 previously deducted balance as of 12/31 you can make a backdoor conversion as above.
If you aren't able to make a backdoor Roth contribution due to a previously deducted IRA balance that you can't roll over into an employer plan then you'll need to contact your IRA custodian and request an excess contribution withdrawal. You'll owe tax on any gains since you contributed, but not any penalties.
