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Roth IRA income limit
Posted on 11/18/20 at 11:49 am
Posted on 11/18/20 at 11:49 am
My wife’s salary fluctuates due to bonuses and we are starting to get close to the Roth IRA income limits, but won’t know until the end of the year if we are allowed to contribute or not. My question is does 2020 income determine 2020 or 2021 contribution limits?
Posted on 11/18/20 at 11:53 am to Simon Gruber
Just do the backdoor ROTH method which will avoid this whole issue.
It may be too late this year since you may have already been contributing past your direct contribution maximum but do that going forward.
It may be too late this year since you may have already been contributing past your direct contribution maximum but do that going forward.
This post was edited on 11/18/20 at 11:55 am
Posted on 11/18/20 at 11:55 am to PillPusher
So what happens if I’ve already contributed too much and we go over the income limit? I currently contribute weekly since we are usually below the income limit, but she got some significant bonuses this year.
Posted on 11/18/20 at 11:59 am to Simon Gruber
Here ya go. This discusses backdoor as well.
Lifehacker
quote:
if you over-contribute to a Roth IRA, you’ll have to withdraw the excess and any earnings on it. Otherwise, you’ll pay a 6% tax on ineligible contributions, plus you’ll pay a 10% early withdrawal penalty if you’re younger than 59.5.
Lifehacker
Posted on 11/18/20 at 11:59 am to Simon Gruber
Someone else can confirm but I would expect there's a form to fill out with tax time to specify any overpayment
Posted on 11/18/20 at 12:18 pm to Simon Gruber
You can either do a backdoor or file an 8606 to reclassify it as a non deductible contribution.
The tricky part with backdoor is you have end up with the pro rata rules which take into account all non Roth monies. You can’t pick and choose which dollars. It’s a percentage or you can do all at once, which might not make sense. It’s a PITA
The tricky part with backdoor is you have end up with the pro rata rules which take into account all non Roth monies. You can’t pick and choose which dollars. It’s a percentage or you can do all at once, which might not make sense. It’s a PITA
Posted on 11/18/20 at 12:27 pm to TigerDeBaiter
My account is with Vanguard. Can they take care of these things?
Posted on 11/18/20 at 12:34 pm to Simon Gruber
You have until tax filing deadline the next year to make a contribution for the previous year.
You can wait to see what the actual numbers are and then make the contribution in Jan- Feb of 2021 for 2020 tax year.
You can wait to see what the actual numbers are and then make the contribution in Jan- Feb of 2021 for 2020 tax year.
Posted on 11/18/20 at 12:36 pm to Simon Gruber
quote:
So what happens if I’ve already contributed too much and we go over the income limit? I
You just have a to remove the over contribution plus and growth on that portion. Happens all the time. Every iRA custodian can walk you through it. No penalties as long as you do it before tax filing.
Posted on 11/18/20 at 12:43 pm to Teddy Ruxpin
quote:
Just do the backdoor ROTH method which will avoid this whole issue.
Posted on 11/18/20 at 12:45 pm to TigerDeBaiter
quote:
The tricky part with backdoor is you have end up with the pro rata rules which take into account all non Roth monies. You can’t pick and choose which dollars. It’s a percentage or you can do all at once, which might not make sense. It’s a PITA
It's literally one of the easiest retirement things to do.
Contribute $6,000 into your traditional IRA's money market.
It will take a day or two to season.
Click the convert to Roth IRA button.
Direct the $6,000 into the Roth IRA's fund of your choice.
That's it.
Posted on 11/19/20 at 4:30 am to TheWiz
Ok. Clearly you’re ignorant on the topic.
There is a lot more nuance than that. Unless this is your first and only retirement vehicle.
There is a lot more nuance than that. Unless this is your first and only retirement vehicle.
Posted on 11/19/20 at 8:49 am to TigerDeBaiter
quote:
There is a lot more nuance than that.
On Vanguard, that is literally all you do. The only extra step is Form 8606 (I think that's it anyway) at tax time.
Here is a step by step on Vanguard's website LINK
quote:
Unless this is your first and only retirement vehicle.
I guess. Besides my 401k, SOLO 401k, my wife's 403B, 457, her Roth IRA, and her TRSL I oversee. But I probably don't know what I'm doing.
This post was edited on 11/19/20 at 9:09 am
Posted on 11/19/20 at 9:21 am to TheWiz
quote:
On Vanguard, that is literally all you do. The only extra step is Form 8606 (I think that's it anyway) at tax time.
Yeah not sure what he is talking about? I have done it through Fidelity no issues. really simple, only thing is you just have to wait for the funds to settle before doing the conversion.
Maybe it is harder when you are not using an online brokerage with all the tools right there?
Posted on 11/19/20 at 2:46 pm to UltimaParadox
It is more complicated if you have other IRA's and that includes rollovers.
Contribute $6,000 into money market in traditional IRA.
I already have $94,000 in a Rollover IRA from a previous job.
Convert $6,000 to Roth IRA (but only 6% is eligible for backdoor).
$360 is backdoor and I owe tax on $5,640.
To answer the OP's question when you are flirting with the limit...put as much as you can into Roth until phase out then backdoor the rest (assuming you don't have other IRA's as detailed above). Your CPA can run the calculation for you. You can do as suggested and do a backdoor even if under the Roth limits (or in phase out) just make sure you don't take the deduction for the traditional IRA part that is eligible.
Contribute $6,000 into money market in traditional IRA.
I already have $94,000 in a Rollover IRA from a previous job.
Convert $6,000 to Roth IRA (but only 6% is eligible for backdoor).
$360 is backdoor and I owe tax on $5,640.
To answer the OP's question when you are flirting with the limit...put as much as you can into Roth until phase out then backdoor the rest (assuming you don't have other IRA's as detailed above). Your CPA can run the calculation for you. You can do as suggested and do a backdoor even if under the Roth limits (or in phase out) just make sure you don't take the deduction for the traditional IRA part that is eligible.
This post was edited on 11/19/20 at 2:48 pm
Posted on 11/19/20 at 6:37 pm to BamaAlum02
Exactly
However he could move the trad IRA money that he is not converting into roth into a 401k. Then the pro rata issue is a non issue because only the money being converted is in a traditional IRA and subject to consideration
However he could move the trad IRA money that he is not converting into roth into a 401k. Then the pro rata issue is a non issue because only the money being converted is in a traditional IRA and subject to consideration
Posted on 11/20/20 at 9:39 am to molsusports
Definitely ways to get around the pro-rata rules, thanks for adding.
I was just trying to address the posters questioning how it can be more complicated.
I was just trying to address the posters questioning how it can be more complicated.
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