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Last Year of Residency and Already Maxed out ROTH IRA, Did I make a Mistake?

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  • Last Year of Residency and Already Maxed out ROTH IRA, Did I make a Mistake?

    Hello

    I am currently in the last year of residency and will be graduating July 2020. I have already secured a job to work in a ED as a independent contractor. I maxed out my ROTH IRA for 2020 in the first week on January earlier this month but I failed to recognize that my income will dramatically rise after residency and I will no longer be eligible to contribute to a ROTH IRA. So my question is, what should I do to the $6000 (plus gains) that I contributed earlier this month to prevent from getting penalized?

    My ROTH IRA is with schwab.

  • #2
    Search the forum.
    Research recharacterize.

    Comment


    • #3
      This talks about recharacterization (including any benefits from the contribution) and reporting guidelines:

      https://www.thebalance.com/what-to-d...th-ira-3192888

      Comment


      • #4
        So if i re-characterize that amount to a traditional IRA, can I then later do a Backdoor Roth IRA of that same amount?

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        • #5
          Okay, lots of bad information floating around here. Roth recharacterizations went away with the Tax Cuts and Jobs Act (TCJA) of 2017. I'm not sure why an enrolled agent is publishing an article on "The Balance" saying they're still a thing back in 2019 or why EnterpreneurMD is linking to bad advice.

          Recharacterizations no longer are a thing. If you contribute to a traditional IRA then convert to a Roth IRA, there's no harm if your income is above or below the threshold for a direct Roth IRA contribution. (Well, you miss out on the tax deduction, but your income is lower so your marginal tax rate is lower.)

          Comment


          • #6
            Originally posted by sam88singh View Post
            So if i re-characterize that amount to a traditional IRA, can I then later do a Backdoor Roth IRA of that same amount?
            yes. you basically need to move the money back to a tIRA to undo your contribution. then you need to convert the tIRA back to a rIRA. youll owe taxes on any gains, then youll file form 8606.

            Comment


            • #7
              Originally posted by Hank View Post
              Okay, lots of bad information floating around here. Roth recharacterizations went away with the Tax Cuts and Jobs Act (TCJA) of 2017. I'm not sure why an enrolled agent is publishing an article on "The Balance" saying they're still a thing back in 2019 or why EnterpreneurMD is linking to bad advice.

              Recharacterizations no longer are a thing. If you contribute to a traditional IRA then convert to a Roth IRA, there's no harm if your income is above or below the threshold for a direct Roth IRA contribution. (Well, you miss out on the tax deduction, but your income is lower so your marginal tax rate is lower.)
              yes only for tIRA to rIRA conversions.

              Comment


              • #8
                Peds and EntrepreneurMD are correct. Those who contribute to Roth IRAs in error continue to be allowed to recharacterize (by the due date of tax return, no extensions allowed) to correct the mistake. Recharacterizations are no longer allowed as a way to "undo" a Roth conversion when the market goes down, converter decides he doesn't like the tax bill, etc. iow, the 2nd bite at the apple is no longer allowed.

                Don't feel bad, Hank - I made that mistake right after the law passed and got my hand slapped by spiritrider.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  Hank, correct me if I'm wrong please.

                  My understanding is you can no longer recharacterize an IRA CONVERSION, but you can still recharacterize an erroneous ROTH IRA CONTRIBUTION. This appears to be the scenario I understood from OP.

                  https://www.irs.gov/instructions/i8606

                  Directly quoted from the IRS: "Recharacterizations

                  Generally, you can recharacterize (correct) an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You generally must make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you can make the transfer within 6 months of the due date of your return, excluding extensions. If necessary, file an amended return reflecting the transfer (see Amending Form 8606, later). Write "Filed pursuant to section 301.9100-2" on the amended return.

                  No recharacterizations of conversions made in 2018 or later.

                  A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made in tax years beginning after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA."

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                  • #10
                    OP, I wouldn't worry about it. Ten and thirty years from now you'll wish you had more Roth, not less. Next year and going forward, you'll contribute tons to pre-tax, do a relatively tiny backdoor Roth, and invest in taxable more or less.

                    Just leave it as is.

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                    • #11
                      My apologies. You can recharacterize a Roth contribution. You no longer can recharacterize a Roth conversion.

                      Comment


                      • #12
                        Originally posted by FIREshrink View Post
                        OP, I wouldn't worry about it. Ten and thirty years from now you'll wish you had more Roth, not less. Next year and going forward, you'll contribute tons to pre-tax, do a relatively tiny backdoor Roth, and invest in taxable more or less.

                        Just leave it as is.
                        Ummm what?

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                        • #13
                          You'll be at risk for perpetual penalty if you leave it as is. I personally would contact Schwab and convert it by April 15 (and long before) if it was me.

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                          • #14
                            Originally posted by Peds View Post

                            Ummm what?
                            Got it, yes he needs to recharacterize then do a backdoor Roth.

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                            • #15
                              Thanks for your help everyone, cleared up a lot of my confusion.

                              I will submit a recharacterization to a tradition IRA and then do a backdoor.

                              Comment

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