Options after exceeding Roth IRA income limit?

Investing Forum
1

With a recent raise, my income will exceed the Roth IRA contribution limit next year. What are the best options moving forward?

2

You can consider a backdoor Roth contribution. This involves contributing after-tax money to a Traditional IRA and then rolling it over to a Roth IRA. This method allows you to bypass the income limits on the Roth IRA.

3

If you don’t have any pre-tax money in a Traditional, Rollover, SEP, or Simple IRA, you can use the backdoor Roth IRA strategy. This involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. Look into guides to ensure you do this correctly.

4

If available, consider increasing contributions to your Traditional 401k or other pre-tax accounts. This could potentially lower your taxable income and help with overall retirement planning. Backdoor Roth contributions are also a good option.

5

You can remove any excess contributions, recharacterize them as contributions to a Traditional IRA (as a step toward a backdoor Roth), or pay a penalty each year the excess remains. Avoid the penalty option as it’s not worth it.

6

First, maximize your 401k and other pre-tax options like HSAs or employer-offered deductions. If you still exceed the Roth IRA income limit, the backdoor Roth is a good option. However, to do it properly, you can’t have any pre-tax dollars in Traditional IRAs. If you do, you’ll need to either roll them into a 401k (if allowed) or convert them to a Roth IRA, which would trigger a taxable event for that year. Be prepared for potential tax implications, especially if you plan to make this a regular strategy moving forward.

7

@Jem
Can you explain how to calculate MAGI in simple terms?

8

RyanEdwards said:
@Jem
Can you explain how to calculate MAGI in simple terms?

MAGI is your adjusted gross income (AGI) with certain deductions added back. For a quick guide, check resources like TurboTax or consult a tax professional.

9

Quick question—if I’ve already contributed to a Roth IRA this year and my income ends up exceeding the limit, do I need to pay taxes on the contributions already made?

10

Amber said:
Quick question—if I’ve already contributed to a Roth IRA this year and my income ends up exceeding the limit, do I need to pay taxes on the contributions already made?

If you’re under the Roth IRA income phase-out limit, you can contribute the full amount. If you’re in the phase-out range, you can contribute a reduced amount based on how much you exceed the lower limit. If your income goes over the maximum allowed, you’ll need to remove the excess contributions. It’s important to monitor your income carefully to avoid penalties.

11

Backdoor Roth contributions would be the way to go in this situation.