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I didn't realize my Roth IRA contributions limits are curtailed starting at ~$125k income. My income is around that, although I guess I wouldn't hit the limit

I didn't realize my Roth IRA contributions limits are curtailed starting at ~$125k income. My income is around that, although I guess I wouldn't hit the limit due to maxing my 401K. What would happen if I contributed too much to an IRA one year? Would I have to pay a penalty during tax season? Would I get the difference back in cash?

auc 5y ago
https://www.investopedia.com/articles/retirement/04/042804.asp https://www.investopedia.com/articles/retirement/04/042804.a... "If you contributed to a Roth when you made too much to qualify—or if you contributed more than you’re allowed to either IRA—you’ve made an excess contribution. That contribution is subject to a 6% tax penalty"
- dataflow 5y ago
  I feel like I read somewhere that you can withdraw the exceeds before the tax filing deadline without penalty, but don't quote me on this; verify it.
auc 5y ago
You can completely avoid this by doing a backdoor roth ira though.
- senkora 5y ago
  Note that congress is interested in closing this however: https://www.fool.com/investing/2022/01/21/you-can-still-do-a-backdoor-roth-in-2022-but-hurry/ https://www.fool.com/investing/2022/01/21/you-can-still-do-a...
  - auc 5y ago
    Yes, the BBB plan would close the backdoor loophole, but that's if it passes and it would be closed 10 years from now.
    - senkora 5y ago
      I’d welcome that, but it’s new information to me and I can’t find confirmation of it. The sources I find all say it could potentially be banned retroactive to the start of this year.
      - auc 5y ago
        Actually, it seem you are right. If BBB passed, they would close the loophole at end of year. The 10 year rule applies to a traditional -> roth conversion to high income earners.
    - Unklejoe 5y ago
      > it would be closed 10 years from now Is that confirmed? I was holding off on doing my backdoor Roth because it seemed like no one was really sure what was going to happen if BBB passes. Most people figure that it would at least take effect in 2023 instead of the original intent of 2022, but as far as I know, it wasn't actually changed.
BigGreenTurtle 5y ago
You can re-characterize the contribution until tax deadline day of the following year, you can contact your investment firm do to that and they'll handle everything. With Vanguard it's as easy as filling out a form and waiting for the process to complete.

auc 5y ago

https://www.investopedia.com/articles/retirement/04/042804.asp https://www.investopedia.com/articles/retirement/04/042804.a... "If you contributed to a Roth when you made too much to qualify—or if you contributed more than you’re allowed to either IRA—you’ve made an excess contribution. That contribution is subject to a 6% tax penalty"

dataflow 5y ago
I feel like I read somewhere that you can withdraw the exceeds before the tax filing deadline without penalty, but don't quote me on this; verify it.

auc 5y ago

You can completely avoid this by doing a backdoor roth ira though.

senkora 5y ago
Note that congress is interested in closing this however: https://www.fool.com/investing/2022/01/21/you-can-still-do-a-backdoor-roth-in-2022-but-hurry/ https://www.fool.com/investing/2022/01/21/you-can-still-do-a...
- auc 5y ago
  Yes, the BBB plan would close the backdoor loophole, but that's if it passes and it would be closed 10 years from now.
  - senkora 5y ago
    I’d welcome that, but it’s new information to me and I can’t find confirmation of it. The sources I find all say it could potentially be banned retroactive to the start of this year.
    - auc 5y ago
      Actually, it seem you are right. If BBB passed, they would close the loophole at end of year. The 10 year rule applies to a traditional -> roth conversion to high income earners.
  - Unklejoe 5y ago
    > it would be closed 10 years from now Is that confirmed? I was holding off on doing my backdoor Roth because it seemed like no one was really sure what was going to happen if BBB passes. Most people figure that it would at least take effect in 2023 instead of the original intent of 2022, but as far as I know, it wasn't actually changed.

BigGreenTurtle 5y ago

You can re-characterize the contribution until tax deadline day of the following year, you can contact your investment firm do to that and they'll handle everything. With Vanguard it's as easy as filling out a form and waiting for the process to complete.