What Happens If You Hit the Roth IRA Income Limit?
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what if you had losses while your contribution was in there?
So to be clear, your CURRENT YEAR MAGI is what is considered for the matching year ROTH contributions correct? For example, your 2021 tax year MAGI finish is NOT what is used to determine your 2022 ROTH contribution limits, correct?
If you contribute all at once you can’t dollar cost average.
I had this happen. Was a tax nightmare for me. Thanks for talking about this
Ughhhh this is me this year. I was unemployed and wasn't expecting to hit the limit this year. Too add to the complexity, I changed the provider of my Roth IRA before I knew my salary and don't remember how much I originally contributed (can find out, just lazy….)
Gee, thanks captain hindsight! Was looking for an answer here and all I got was "you shouldn't let that happen."
You never said what to do, but rather what not to do. So this happened to me. I pulled the money out of the Roth IRA. After talking with a Fidelity representative we recharacterized it into my rollover IRA. Now that I did that I'm not sure that was a good idea. Now I may have to pay taxes on the money when I withdraw from the rollover IRA – again. I was told I needed to file a 8606? And then something about paying taxes on somethung like 99.9% of my IRA withdrawals the rest of my life. I think by recharacterizng this money and having to mess with the funky math for eternity on future withdrawals makes this not worth it. Should have just took the cash back out and paid down my house or something.
How do you now for sure that that you didn't cross that limit? My taxes provide an Adjusted Gross Income value, but not MAIG. I'm pretty sure I'm ok, but it's hard to tell 100%.
I'm at 109k AIG according to my taxes in 2020. I did max out my traditional 401k. last year. This year, I'm splitting my 401k between traditional and Roth 50/50 and maxing them out. I'm guessing this is going to increase my AIG some.
I wish more people talk about this. I think the penalties are pretty big if you contribute when you are over the limit. It seems like a dumb rule anyway….especially since you can backdoor it.
This happened to my gf. We just realized that she was way over in 2020 and only have a few days to file taxes. Her 401k is maxed out. Let me tell you… it is a pain in the ass. Especially when you are so close to the tax day deadline.
Honestly, hitting the income limits on a Roth IRA is not a bad problem to have. We talking over six figures here.
love the show and my friend needed this question answered! are you doing another video about the "hairy mess" when undoing contributions?
I had this situation happen as well. I just opened a traditional ira and rolled my contributions into that account. It turns out I still have to pay taxes on the contributions because I made too much money to defer the taxes, but at least I don’t owe an early withdrawal penalty.
Am I right in thinking that the main issue is less about paying the tax/penalties and more about the annoyance/complexity of having to calculate the exact amount of earnings attributable to the overcontribution and filing the necessary paperwork in accordance with the tax code?
Great question and answer. Same issue for me in 2020
Too bad she didn't mention if she was participating in a company 401K plan, so there was a better picture to provide guidance. Also, was she talking about hitting the phase out limit of $125K or the end of the phase out limit of $140K?
Don't most people know the range of their raise and/or bonus? They should have anticipated that the situation would occur. Also, it unlikely that you go from being 100% eligible and 100% non-eligible. There is phase out range, so dollars cost averaging should still work.
To my understanding, the caller was asking what should she do once she hits the contribution limit for her Roth IRA. (What else should she invest in/alternatives/etc) I feel like you guys answered the question what should she do IF she over-contributes to her Roth IRA.
You may also be able to do things like increase your contributions to your 401k/457. This will reduce your take home pay and put you under the income limit.
See if your boss is will to defer your last month's pat to next year
fortunate to be over the limit for direct roth contributions but i would think a backdoor roth would solve all that
When I was approaching that limit, re-characterizations were a thing. If I were approaching the limit now, I would just do the backdoor Roth even if I may not need to. Lets you deploy it at the beginning of the year and not worry about penalty, etc.
That’s why we have financial advisers. Back door Roth works.
Never seen this very important issue addressed on any other financial show. I may be over this year, so good to know. Thanks!
what if your over the Roth limit for the past 3 years, becasue of raises and pay will be going up the next 4 years what are the options?
what about recharacterization from roth ira to ira and then covert to Roth? I ran into the same situation last yeat and this worked for me
If you’re barely over the limit, can’t you contribute to your traditional 401K to lower your MAGI to within the limit for roth ira?
Hmm……no thoughts on turning down the raise or bonus? lol
I hit the limit in April. So I stopped investing and was saving for a house, but would like to continue to invest ideally… Happy Mothers Day to all the moms 🙂