My wife and I are aiming to max out our Roth IRAs this year. But due to some luck, it looks like we might end up pushing the income limit of $240k.
I know there’s an option to go the backdoor Roth route, but that’s not really my question. I’m more curious about what kind of penalty or fees we’d face if we go over $240k, max out both IRAs, and skip the backdoor process.
I can’t seem to find a clear answer anywhere, maybe I’m not searching right. Any advice?
Your IRA provider should allow you to switch the contributions to a traditional IRA. Just reach out to them and explain your situation.
Palmer said:
Your IRA provider should allow you to switch the contributions to a traditional IRA. Just reach out to them and explain your situation.
Would switching the contributions really help? If they’re after-tax money, isn’t it kind of the same as a brokerage account then?
@Chen
If you don’t change it, the IRS could hit you with a penalty for adding money to an account that you technically can’t contribute to.
@Chen
Once it’s in a traditional IRA, you can convert it back to a Roth through the backdoor route, so you keep the Roth benefits. Not a tax benefit this year, but it still grows tax-free.
@Chen
There are a couple of reasons to fix it. If you don’t, you’re hit with a 6% penalty each year until it’s corrected. That adds up fast, so you definitely want to fix it by the end of the year to avoid it.
You could have them remove the excess contributions entirely or recharacterize them to traditional and then go back to a Roth. You’d pay taxes only on any gains, which is usually a small amount.
@Scout
Also keep in mind if you have any existing traditional IRA money, the pro-rata rule could complicate things. If you have both pre-tax and after-tax funds, the IRS makes you tax a percentage of the converted amount based on the pre-tax funds.
@Finley
Good point! If the poster clarifies that they have a traditional IRA, there are ways around this, but it’s only worth mentioning if it’s relevant here.
@Chen
Right, because you can get penalties for contributing over the income limit. I think it’s a 6% penalty, which seems silly when you could just recharacterize and roll it over to a Roth.
@Chen
If you don’t have any money in traditional IRAs, you can just convert it to Roth, avoiding the pro-rata rule. The only difference with a backdoor Roth is that you need to file a Form 8606, and you can’t touch the money for five years without penalties.
@Chen
Doing this keeps you from getting penalized for contributing to a Roth when you’re not supposed to.
Just recharacterize it as a non-deductible traditional IRA, then backdoor that into a Roth.
Lennox said:
Just recharacterize it as a non-deductible traditional IRA, then backdoor that into a Roth.
Exactly. First, recharacterize to a traditional IRA, then convert it to a Roth. Recharacterization is like saying, “I messed up; please make this traditional.” Conversion is saying, “Now let’s make it Roth through the backdoor.”
The order matters here!
@Corey
How do you actually make the switch from traditional to Roth?
Kim said:
@Corey
How do you actually make the switch from traditional to Roth?
Depends on where you bank. At Vanguard, there’s a ‘Convert to Roth IRA’ button right in the account. Just fund the traditional, hit the button, and it moves over.
@Vale
Are there any forms you need to file, or does Vanguard handle it?
Rey said:
@Vale
Are there any forms you need to file, or does Vanguard handle it?
No forms needed at the time of conversion, but you’ll need to file Form 8606 with your taxes to report it.
@Vale
Would watching a YouTube tutorial or reading an article be enough to handle this, or is it better to have a pro help out the first time?
Rey said:
@Vale
Would watching a YouTube tutorial or reading an article be enough to handle this, or is it better to have a pro help out the first time?
If you’re comfortable with taxes, you can handle it. Just contribute to a traditional IRA, convert it to Roth, and file Form 8606. I’d recommend using software like FreeTaxUSA, although I file on paper due to a unique tax setup.
@Vale
Thanks! I was worried it might be too tricky, like if some interest puts me just over the limit and gets me penalized.