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Contributing to a ROTH, but we are over the limit

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  • Contributing to a ROTH, but we are over the limit

    I am new to this forum/website and am finally trying to get my family's finances in order. I am just now realizing that we are currently contributing to a Roth IRA, but our income puts us significantly over the income limit. We make around 250k a year. What do I do NOW to fix this problem before the end of the year. Can I do the back door IRA? Also we contributed last year to our ROTH IRAs and were over the limit then too! Do I need to do something about that? I'm sure there are penalties involved with that... Any help would be greatly appreciated. Thanks!

  • #2
    You are on track.  You will want to use a back door Roth IRA.  For last year's contributions, you will want to file an amended tax return and withdraw the contributions from your account.  Otherwise you will be subject to a 6% penalty.  This penalty is waived if you withdraw before filing your taxes, hence the amended return.

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    • #3
      First, for your 2017 Roth IRA contributions, you can simply do a recharaterization and have your 2017 Roth IRA contributions treated as Traditional IRA contributions.

      Good news on last year's Roth IRA contributions, too. The deadline for recharacterizing a 2016 Roth IRA contribution is your tax-filing deadline plus extensions. Which means your deadline to recharacterize a 2016 contribution is October 15, 2017. So, there is still time left to fix your 2016 problem.

      So, once both recharacterizations are complete and assuming you have no other Traditional IRAs or Rollover IRAs that would cause you to run afoul of the IRA aggregation rules, you can then complete your Backdoor Roth IRAs.

      Keep in mind that the IRS provides a special formula for calculating the earnings or losses on the amount that is being recharacterized. So, if you contributed $5,500 to your Roth IRA in both 2016 and 2017, it's doubful that your balance in your Traditional IRA - after recharacterization - will be $11,000, as you will have undoubtedly experienced gains and losses. As a result, you may owe some taxes on this conversion if you experienced gains while your contributions were in your Roth IRA.

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