What happens if you max out a Roth IRA and end up over the income limit?

General
21

Rey said:
@Vale
Thanks! I was worried it might be too tricky, like if some interest puts me just over the limit and gets me penalized.

I can share my approach:

Starting in 2025:

  1. Deposit after-tax money in January or February to a traditional IRA.
  2. Wait a day, then move it to a Roth IRA. Waiting prevents the funds from increasing too much.
  3. File Form 8086 when you do your taxes to report it.

There’s a great video on TurboTax’s process if you’re interested: https://youtu.be/6dujGp-DJ4s?si=srjMO3WSiN2Hv2fY

22

@Eli
Oh, that’s good to know. I was overthinking this whole process.

23

Rey said:
@Vale
Thanks! I was worried it might be too tricky, like if some interest puts me just over the limit and gets me penalized.

With Vanguard, you just enter the amount to convert. You don’t risk any extra interest putting you over the limit.

24

Rey said:
@Vale
Are there any forms you need to file, or does Vanguard handle it?

Do you pay tax right away, or does Vanguard handle it?

25

Jensen said:

Rey said:
@Vale
Are there any forms you need to file, or does Vanguard handle it?

Do you pay tax right away, or does Vanguard handle it?

Roth is post-tax money, so there’s no tax due. If it’s in a traditional, you could deduct it, but converting to Roth requires just filing Form 8606.

26

@Vale
Quick question. I have a Roth and a traditional IRA from a former employer’s SIMPLE IRA. Can I convert the whole traditional into Roth? I know it’s pre-tax, so I’d pay taxes, right?

27

True said:
@Vale
Quick question. I have a Roth and a traditional IRA from a former employer’s SIMPLE IRA. Can I convert the whole traditional into Roth? I know it’s pre-tax, so I’d pay taxes, right?

You can, but you’ll owe taxes on past contributions that were tax-free. It could push you into a higher tax bracket, so maybe check with a CPA first.

28

@Vale
Right. Any pre-tax amount converted will be added to your yearly income, which could bump you up.

29

True said:
@Vale
Quick question. I have a Roth and a traditional IRA from a former employer’s SIMPLE IRA. Can I convert the whole traditional into Roth? I know it’s pre-tax, so I’d pay taxes, right?

Yes.

30

Kim said:
@Corey
How do you actually make the switch from traditional to Roth?

It’s just a transfer from traditional to Roth. It will say ‘conversion’ when you do it.

31

Lennox said:
Just recharacterize it as a non-deductible traditional IRA, then backdoor that into a Roth.

Philly style slang at its finest.

32

Lennox said:
Just recharacterize it as a non-deductible traditional IRA, then backdoor that into a Roth.

Exactly. Just be aware you’ll pay taxes on any gains made, but it’s usually minor. After that, do a backdoor Roth yearly even if your income is borderline, just to keep things simple.

33

@Scout
Wait, so you don’t open a new traditional every year? Just transfer the money?

34

Zane said:
@Scout
Wait, so you don’t open a new traditional every year? Just transfer the money?

Exactly, you’re just transferring the funds, not creating a new account. Fidelity, for example, has a checkbox for keeping $0 balance accounts open. Convert any extra interest too, so it’s all zeroed out.

35

@Scout
Should you deposit slightly less than $7k to avoid going over the limit with interest?

36

Rey said:
@Scout
Should you deposit slightly less than $7k to avoid going over the limit with interest?

Nope, $7k is the contribution cap, not the conversion cap. Just convert it all, even if it’s $7,002. You’ll owe taxes on the extra couple of bucks but it’s minimal.

37

@Scout
Makes sense, thanks for breaking it down. If one spouse qualifies but the other doesn’t, can they do a backdoor Roth if filing jointly?

38

Zane said:
@Scout
Makes sense, thanks for breaking it down. If one spouse qualifies but the other doesn’t, can they do a backdoor Roth if filing jointly?

Nope, it’s based on household income if filing jointly. If filing separately, it’s trickier and there are some restrictions.

39

Income limits are based on MAGI, so 401k contributions and the standard deduction can lower it. If you’re at $240k but have a $30k standard deduction, you’d be under the limit.

40

Noor said:
Income limits are based on MAGI, so 401k contributions and the standard deduction can lower it. If you’re at $240k but have a $30k standard deduction, you’d be under the limit.

Thanks for clearing that up.