401k / Tax Question

You can put it in a Roth, but you are still going to owe taxes on the 14k that you had refunded out of the 401k. I'm guessing that you are above the Roth income limits for this year since you are a HCE. Put $12k in a Traditional IRA ($6,000 for 2019 and $6,000 for 2020) and then have it rolled over into a Roth IRA (backdoor Roth). Then, hang on to the additional $2k that you have to pay taxes on the $14k refund.

14k seems like a lot to refund. If this is a normal thing with your company, I would monitor 401k contributions to make sure you aren't on the hook for another big refund in coming years.

Considering your 401K at work and your income, you are likely not able to get a deduction for a contribution to a Traditional IRA. I'm also assuming you make too much to do a regular Roth contribution.

Other than things like giving that money to charity and assuming you already itemize, there isn't much you can do to avoid the 2020 tax hit. It's basically just additional income to you. Also, they probably didn't withhold enough, so keep that in mind as well.

If you are trying to manage future taxes, you could do one of a couple things.

1) Contribute $6,000 (12K if married) to a traditional IRA. You won't get a deduction this year. But, you will now have "basis" in the IRA that will be applied to later distributions. You will need to report this on Form 8606 and keep up with it over the years.

2) Do the "back-door" Roth. You contribute the money to a traditional IRA, get the basis, then almost immediately, convert the 6K per person into a Roth. The problem is, you stated you already have a Traditional IRA. So if you go the Roth conversion route, the 6K you convert will be considered a pro-rata blend of old and new money. So you will have to pay *some* tax on this conversion.

Let's say you have 14K in the account now, and you add 6K. You then immediately convert 6K.

Of the 6K, 6K/20K or 30% or $1,800 would be a tax-free movement (because of the basis) and 70% or $4,200 would be taxable at current rates (but no 10% early penalty).

You would now have a Roth of 6K, and a Traditional of 14K with $4,200 basis in it.

quote:

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Not above Roth limits for the year.

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Then, I would definitely put two years of contributions into a Roth. Just to be clear though, even if you put it into a Roth, you are still going to owe taxes on that $14k refund.

I tend to prefer Roth IRAs since I think that taxes will only go up in the future, but I guess it depends on whether or not you can handle the tax hit of that $15k along with the $14k refund when you file taxes for the 2020 year.

They do this to me every year, unfortunately if you are in the tax bracket there is nothing you can do

Thanks again!