Over paid Roth, switch to Traditional, and Back?

[homerenoae]

This is the first year this is an issue for us, and we weren't expecting it to be an issue. We maxed out out Roths, but now it looks like we are in the phase out bracket and can only do $500 each.

So from what I understand, we need to go into our vanguard accounts and do we move money out and into a Traditional Roth, or is it just a reclassification? Or do we need to call? 

Is a back door still an option? I read about it on nerdwallet, but do not really understand. Do we move it back after we have paid our 2019 taxes? Would we put the normal 6000 minus the 500 we are allowed to keep in the Roth back in? Or are there other limits on the back door? 

We have already done our 2020 Roths, but with the market so far down, I don't think this will be an issue again because it was our investments/dividends that pushed us so far up, not our normal income. But otherwise, is there a penalty for putting the money in a Roth if you know you might not qualify? 

And just to cover all my basis, this has nothing to do with our 401k and those limits, correct? 

[Poppy]

Apr 9, 2020 20:48:49 GMT -5 homerenoae said:

This is the first year this is an issue for us, and we weren't expecting it to be an issue. We maxed out out Roths, but now it looks like we are in the phase out bracket and can only do $500 each.

So from what I understand, we need to go into our vanguard accounts and do we move money out and into a Traditional Roth, or is it just a reclassification? Or do we need to call? 

Is a back door still an option? I read about it on nerdwallet, but do not really understand. Do we move it back after we have paid our 2019 taxes? Would we put the normal 6000 minus the 500 we are allowed to keep in the Roth back in? Or are there other limits on the back door? 

We have already done our 2020 Roths, but with the market so far down, I don't think this will be an issue again because it was our investments/dividends that pushed us so far up, not our normal income. But otherwise, is there a penalty for putting the money in a Roth if you know you might not qualify? 

And just to cover all my basis, this has nothing to do with our 401k and those limits, correct? 

You need to recharacterize the excess contributions of $5,500 to your traditional IRA by the tax deadline (not sure if that's 4/15 or the July filing deadline this year). It should just require a simple phone call to the financial institution. It does affect your tax paperwork but sw like TurboTax should handle that pretty easily. There is no penalty ever unless you fail to recharacterize by the deadline.

Yes, you can then convert it to Roth a la backdoor, although some people recommend a waiting period just like with any backdoor Roth contribution. It has nothing to do with 401(k) limits.

[Poppy]

Oops, apparently you actually have until October 15th to recharacterize but if you do it after you file, you have to file an amended return.

www.bogleheads.org/wiki/IRA_recharacterization

[homerenoae]

Poppy, this was so helpful, thank you!