Contributing to Roth IRA at beginning of year
I plan to contribute the maximum $6000 to my Roth IRA for 2019 in the next month. However, there is a good possibility I will make over $122,000 dollars with overtime and therefore will be disqualified from contributing.
What happens if I do make over $122,000? Do I have to take the money out?
united-states roth-ira
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
add a comment |
I plan to contribute the maximum $6000 to my Roth IRA for 2019 in the next month. However, there is a good possibility I will make over $122,000 dollars with overtime and therefore will be disqualified from contributing.
What happens if I do make over $122,000? Do I have to take the money out?
united-states roth-ira
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
1
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
1
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49
add a comment |
I plan to contribute the maximum $6000 to my Roth IRA for 2019 in the next month. However, there is a good possibility I will make over $122,000 dollars with overtime and therefore will be disqualified from contributing.
What happens if I do make over $122,000? Do I have to take the money out?
united-states roth-ira
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
I plan to contribute the maximum $6000 to my Roth IRA for 2019 in the next month. However, there is a good possibility I will make over $122,000 dollars with overtime and therefore will be disqualified from contributing.
What happens if I do make over $122,000? Do I have to take the money out?
united-states roth-ira
united-states roth-ira
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
edited Jan 2 at 21:34
Ben Miller
79.8k19219286
79.8k19219286
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
asked Jan 2 at 20:55
theblindprophettheblindprophet
1427
1427
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
1
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
1
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49
add a comment |
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
1
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
1
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
1
1
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
1
1
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49
add a comment |
3 Answers
3
active
oldest
votes
That may be the simplest option, but there are others.
from non-authoritative source RothIRA.com:
Recharacterize Your Contribution
Ideally you would be able to recharacterize your extra contributions
and any NIA into a Traditional IRA. “Recharacterize” means essentially
“I don’t want these to go toward a Roth, I want them to go to a
Traditional IRA.” This also assumes you would qualify to contribute to
a Traditional IRA for that tax year. This is ideal because you’re
still saving for retirement.
Withdraw Your Contribution Overage
If you don’t qualify for a Traditional IRA (and thus cannot
recharacterize your overage), you can simply withdraw the extra
contribution and any NIA (income earned by the excess contributions).
Apply Your Contribution to a Future Year
You can also apply the excess contribution and NIA to a future year.
You may have to pay a 6 percent tax to the IRS to be able to do this.
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
add a comment |
I prefer this method because there are no decision points based on income. However, it depends on not having any existing traditional IRAs or converting them to Roth first.
Contribute to a Traditional IRA...
There are no income limits for this. Do this at the same institution where you keep your Roth. Invest the money in a cash sweep account, do not put it in anything interest bearing, and especially, not in a bond or stock.
There are income limits for taking the tax deduction, but that matters not, since you don't want to do that. That makes it a Non-Deductible IRA, and the amount of your contribution will not be taxed when it comes back out, since you already did pay taxes on it. Gains would be taxable, so we're avoiding gains by putting it in a cash sweep account.
... Then, convert to Roth
The very next day, convert the amount in the traditional IRA to Roth. There is no income limit on this either.
There is also no tax, because you are converting money you "already paid taxes on".
Normally, when you convert to Roth, you must treat the converted amount as taxable income, and normally you would aim to do this in a gap year. However, since you are converting from a non-deductible traditional IRA, there is no tax on the amount you contributed (yesterday).
Together these two are the "Roth backdoor" and can be done at any income level (provided your taxable income >= the contribution.)
answered Jan 2 at 21:53
HarperHarper
23.4k53580
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
|
show 2 more comments
One option is to put the money into a non-deductible IRA in January 2019 making sure the custodian knows it is for 2019. Then a few days later do a backdoor Roth conversion.
You will have to pay any taxes on the gains while it is in the non-deductible traditional IRA, but that shouldn't be that much.
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
add a comment |
Your Answer
StackExchange.ready(function() {
var channelOptions = {
tags: "".split(" "),
id: "93"
};
initTagRenderer("".split(" "), "".split(" "), channelOptions);
StackExchange.using("externalEditor", function() {
// Have to fire editor after snippets, if snippets enabled
if (StackExchange.settings.snippets.snippetsEnabled) {
StackExchange.using("snippets", function() {
createEditor();
});
}
else {
createEditor();
}
});
function createEditor() {
StackExchange.prepareEditor({
heartbeatType: 'answer',
autoActivateHeartbeat: false,
convertImagesToLinks: true,
noModals: true,
showLowRepImageUploadWarning: true,
reputationToPostImages: 10,
bindNavPrevention: true,
postfix: "",
imageUploader: {
brandingHtml: "Powered by u003ca class="icon-imgur-white" href="https://imgur.com/"u003eu003c/au003e",
contentPolicyHtml: "User contributions licensed under u003ca href="https://creativecommons.org/licenses/by-sa/3.0/"u003ecc by-sa 3.0 with attribution requiredu003c/au003e u003ca href="https://stackoverflow.com/legal/content-policy"u003e(content policy)u003c/au003e",
allowUrls: true
},
noCode: true, onDemand: true,
discardSelector: ".discard-answer"
,immediatelyShowMarkdownHelp:true
});
}
});
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function () {
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fmoney.stackexchange.com%2fquestions%2f103572%2fcontributing-to-roth-ira-at-beginning-of-year%23new-answer', 'question_page');
}
);
Post as a guest
Required, but never shown
3 Answers
3
active
oldest
votes
3 Answers
3
active
oldest
votes
active
oldest
votes
active
oldest
votes
That may be the simplest option, but there are others.
from non-authoritative source RothIRA.com:
Recharacterize Your Contribution
Ideally you would be able to recharacterize your extra contributions
and any NIA into a Traditional IRA. “Recharacterize” means essentially
“I don’t want these to go toward a Roth, I want them to go to a
Traditional IRA.” This also assumes you would qualify to contribute to
a Traditional IRA for that tax year. This is ideal because you’re
still saving for retirement.
Withdraw Your Contribution Overage
If you don’t qualify for a Traditional IRA (and thus cannot
recharacterize your overage), you can simply withdraw the extra
contribution and any NIA (income earned by the excess contributions).
Apply Your Contribution to a Future Year
You can also apply the excess contribution and NIA to a future year.
You may have to pay a 6 percent tax to the IRS to be able to do this.
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
add a comment |
That may be the simplest option, but there are others.
from non-authoritative source RothIRA.com:
Recharacterize Your Contribution
Ideally you would be able to recharacterize your extra contributions
and any NIA into a Traditional IRA. “Recharacterize” means essentially
“I don’t want these to go toward a Roth, I want them to go to a
Traditional IRA.” This also assumes you would qualify to contribute to
a Traditional IRA for that tax year. This is ideal because you’re
still saving for retirement.
Withdraw Your Contribution Overage
If you don’t qualify for a Traditional IRA (and thus cannot
recharacterize your overage), you can simply withdraw the extra
contribution and any NIA (income earned by the excess contributions).
Apply Your Contribution to a Future Year
You can also apply the excess contribution and NIA to a future year.
You may have to pay a 6 percent tax to the IRS to be able to do this.
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
add a comment |
That may be the simplest option, but there are others.
from non-authoritative source RothIRA.com:
Recharacterize Your Contribution
Ideally you would be able to recharacterize your extra contributions
and any NIA into a Traditional IRA. “Recharacterize” means essentially
“I don’t want these to go toward a Roth, I want them to go to a
Traditional IRA.” This also assumes you would qualify to contribute to
a Traditional IRA for that tax year. This is ideal because you’re
still saving for retirement.
Withdraw Your Contribution Overage
If you don’t qualify for a Traditional IRA (and thus cannot
recharacterize your overage), you can simply withdraw the extra
contribution and any NIA (income earned by the excess contributions).
Apply Your Contribution to a Future Year
You can also apply the excess contribution and NIA to a future year.
You may have to pay a 6 percent tax to the IRS to be able to do this.
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
That may be the simplest option, but there are others.
from non-authoritative source RothIRA.com:
Recharacterize Your Contribution
Ideally you would be able to recharacterize your extra contributions
and any NIA into a Traditional IRA. “Recharacterize” means essentially
“I don’t want these to go toward a Roth, I want them to go to a
Traditional IRA.” This also assumes you would qualify to contribute to
a Traditional IRA for that tax year. This is ideal because you’re
still saving for retirement.
Withdraw Your Contribution Overage
If you don’t qualify for a Traditional IRA (and thus cannot
recharacterize your overage), you can simply withdraw the extra
contribution and any NIA (income earned by the excess contributions).
Apply Your Contribution to a Future Year
You can also apply the excess contribution and NIA to a future year.
You may have to pay a 6 percent tax to the IRS to be able to do this.
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
answered Jan 2 at 21:04
D StanleyD Stanley
56.7k10168171
56.7k10168171
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
add a comment |
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
1
1
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
Almost everyone with compensation is entitled to contribute to a Traditional IRA; the disqualification that you refer to is for deducting the Traditional IRA contribution -- said deduction not being allowed for high earners. Since the OP is already committing to contributing the maximum amount to a _Roth IRA (which provides for no deductions from taxable income for the contribution), just recharacterizing the contribution as a nondeductible contribution to a Traditional IRA is no skin off his nose.
– Dilip Sarwate
Jan 2 at 22:10
add a comment |
I prefer this method because there are no decision points based on income. However, it depends on not having any existing traditional IRAs or converting them to Roth first.
Contribute to a Traditional IRA...
There are no income limits for this. Do this at the same institution where you keep your Roth. Invest the money in a cash sweep account, do not put it in anything interest bearing, and especially, not in a bond or stock.
There are income limits for taking the tax deduction, but that matters not, since you don't want to do that. That makes it a Non-Deductible IRA, and the amount of your contribution will not be taxed when it comes back out, since you already did pay taxes on it. Gains would be taxable, so we're avoiding gains by putting it in a cash sweep account.
... Then, convert to Roth
The very next day, convert the amount in the traditional IRA to Roth. There is no income limit on this either.
There is also no tax, because you are converting money you "already paid taxes on".
Normally, when you convert to Roth, you must treat the converted amount as taxable income, and normally you would aim to do this in a gap year. However, since you are converting from a non-deductible traditional IRA, there is no tax on the amount you contributed (yesterday).
Together these two are the "Roth backdoor" and can be done at any income level (provided your taxable income >= the contribution.)
answered Jan 2 at 21:53
HarperHarper
23.4k53580
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
|
show 2 more comments
I prefer this method because there are no decision points based on income. However, it depends on not having any existing traditional IRAs or converting them to Roth first.
Contribute to a Traditional IRA...
There are no income limits for this. Do this at the same institution where you keep your Roth. Invest the money in a cash sweep account, do not put it in anything interest bearing, and especially, not in a bond or stock.
There are income limits for taking the tax deduction, but that matters not, since you don't want to do that. That makes it a Non-Deductible IRA, and the amount of your contribution will not be taxed when it comes back out, since you already did pay taxes on it. Gains would be taxable, so we're avoiding gains by putting it in a cash sweep account.
... Then, convert to Roth
The very next day, convert the amount in the traditional IRA to Roth. There is no income limit on this either.
There is also no tax, because you are converting money you "already paid taxes on".
Normally, when you convert to Roth, you must treat the converted amount as taxable income, and normally you would aim to do this in a gap year. However, since you are converting from a non-deductible traditional IRA, there is no tax on the amount you contributed (yesterday).
Together these two are the "Roth backdoor" and can be done at any income level (provided your taxable income >= the contribution.)
answered Jan 2 at 21:53
HarperHarper
23.4k53580
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
|
show 2 more comments
I prefer this method because there are no decision points based on income. However, it depends on not having any existing traditional IRAs or converting them to Roth first.
Contribute to a Traditional IRA...
There are no income limits for this. Do this at the same institution where you keep your Roth. Invest the money in a cash sweep account, do not put it in anything interest bearing, and especially, not in a bond or stock.
There are income limits for taking the tax deduction, but that matters not, since you don't want to do that. That makes it a Non-Deductible IRA, and the amount of your contribution will not be taxed when it comes back out, since you already did pay taxes on it. Gains would be taxable, so we're avoiding gains by putting it in a cash sweep account.
... Then, convert to Roth
The very next day, convert the amount in the traditional IRA to Roth. There is no income limit on this either.
There is also no tax, because you are converting money you "already paid taxes on".
Normally, when you convert to Roth, you must treat the converted amount as taxable income, and normally you would aim to do this in a gap year. However, since you are converting from a non-deductible traditional IRA, there is no tax on the amount you contributed (yesterday).
Together these two are the "Roth backdoor" and can be done at any income level (provided your taxable income >= the contribution.)
answered Jan 2 at 21:53
HarperHarper
23.4k53580
I prefer this method because there are no decision points based on income. However, it depends on not having any existing traditional IRAs or converting them to Roth first.
Contribute to a Traditional IRA...
There are no income limits for this. Do this at the same institution where you keep your Roth. Invest the money in a cash sweep account, do not put it in anything interest bearing, and especially, not in a bond or stock.
There are income limits for taking the tax deduction, but that matters not, since you don't want to do that. That makes it a Non-Deductible IRA, and the amount of your contribution will not be taxed when it comes back out, since you already did pay taxes on it. Gains would be taxable, so we're avoiding gains by putting it in a cash sweep account.
... Then, convert to Roth
The very next day, convert the amount in the traditional IRA to Roth. There is no income limit on this either.
There is also no tax, because you are converting money you "already paid taxes on".
Normally, when you convert to Roth, you must treat the converted amount as taxable income, and normally you would aim to do this in a gap year. However, since you are converting from a non-deductible traditional IRA, there is no tax on the amount you contributed (yesterday).
Together these two are the "Roth backdoor" and can be done at any income level (provided your taxable income >= the contribution.)
answered Jan 2 at 21:53
HarperHarper
23.4k53580
edited Jan 3 at 2:23
answered Jan 2 at 21:53
HarperHarper
23.4k53580
answered Jan 2 at 21:53
HarperHarper
23.4k53580
answered Jan 2 at 21:53
HarperHarper
23.4k53580
23.4k53580
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
|
show 2 more comments
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
1
1
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
Since the strategy you mention, called a "backdoor roth" this is clearly doing an end run around the income limits for Roth Contributions, there is some concern that if the conversion is done immediately after the contribution, that the whole thing could be disqualified. Legal experts commonly recommend letting them settle for some time. Also ALL* of your tradional and IRA rollover assets are considered when calculating the taxable amount for the conversion, so essentially if you have much money in an IRA it would prevent you from using the backdoor roth strategy.
– T. M.
Jan 3 at 2:00
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
@T.M. I'd need to see some refs on your first claim, but I wholeheartedly agree with your second, he would need to add the new IRA in with the rest of his traditional IRAs, and apportion the conversion, the paperwork would be a nightmare, better to just convert all traditional IRAs at that point and take the tax hit. Unless one is expecting to have a gap year anytime soon. My advice presumes all his IRAs so far are Roth.
– Harper
Jan 3 at 2:22
1
1
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
My ref is unfortunately the tax attorney I chatted about the strategy with, but here is the basic idea: kitces.com/blog/… and another:forbes.com/sites/greatspeculations/2017/10/16/… search ahead for step transaction doctrine.
– T. M.
Jan 3 at 2:30
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
@T.M.: Not a problem -- step transaction is specifically mentioned as something some advisors brought up but backdoor Roth is now definitely allowed: forbes.com/sites/jeffreylevine/2018/07/13/…
– Ben Voigt
Jan 3 at 5:21
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
Interesting, that's new. I didn't go read the conference report govinfo.gov/content/pkg/CRPT-115hrpt466/pdf/CRPT-115hrpt466.pdf they mention in the linked article, but I'll believe them. Also interesting from the linked article is that characterizations are eliminated. I guess I need to keep up more. :)
– T. M.
Jan 3 at 11:14
|
show 2 more comments
One option is to put the money into a non-deductible IRA in January 2019 making sure the custodian knows it is for 2019. Then a few days later do a backdoor Roth conversion.
You will have to pay any taxes on the gains while it is in the non-deductible traditional IRA, but that shouldn't be that much.
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
add a comment |
One option is to put the money into a non-deductible IRA in January 2019 making sure the custodian knows it is for 2019. Then a few days later do a backdoor Roth conversion.
You will have to pay any taxes on the gains while it is in the non-deductible traditional IRA, but that shouldn't be that much.
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
add a comment |
One option is to put the money into a non-deductible IRA in January 2019 making sure the custodian knows it is for 2019. Then a few days later do a backdoor Roth conversion.
You will have to pay any taxes on the gains while it is in the non-deductible traditional IRA, but that shouldn't be that much.
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
One option is to put the money into a non-deductible IRA in January 2019 making sure the custodian knows it is for 2019. Then a few days later do a backdoor Roth conversion.
You will have to pay any taxes on the gains while it is in the non-deductible traditional IRA, but that shouldn't be that much.
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
answered Jan 2 at 21:33
mhoran_psprepmhoran_psprep
68.7k895173
68.7k895173
add a comment |
add a comment |
Thanks for contributing an answer to Personal Finance & Money Stack Exchange!
- Please be sure to answer the question. Provide details and share your research!
But avoid …
- Asking for help, clarification, or responding to other answers.
- Making statements based on opinion; back them up with references or personal experience.
To learn more, see our tips on writing great answers.
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function () {
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fmoney.stackexchange.com%2fquestions%2f103572%2fcontributing-to-roth-ira-at-beginning-of-year%23new-answer', 'question_page');
}
);
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Did you already contribute the maximum for 2018? You can make your 2018 contribution up until the April tax deadline.
– Hart CO
Jan 2 at 22:37
1
@HartCO Yes, maxed for 2017, 2018.
– theblindprophet
Jan 2 at 23:02
1
Does your employer offer a 401k? If so, contributing to one will reduce your Modified Adjusted Gross Income, or MAGI. Keep in mind that the $122,000 limit applies to your MAGI, not your gross salary. Example: you earn $140,000 and contribute the 2019 max of $19000 to your 401k. Your MAGI would be $121,000, making you eligible for the full Roth contribution.
– bigh_29
Jan 3 at 0:49