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Accidentally contributed to Roth, how to fix!?

Home Retirement Accounts Accidentally contributed to Roth, how to fix!?

  • Avatar YIFP
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/22/2019

    My non-physician professional husband opened a Roth through his work, not realizing that we exceeded the income limits for contributing to a Roth IRA.  He put in about $2600 so far.  We are worried that since we “broke the rules” we could cause a tax problem.  I am really not clear on what our options are.

     

    Can we roll over to a taxable account (within Vanguard?)

    Is this the time for a “Backdoor Roth”?  Have never done this.  We did already stop contributions to this account when we realized the error.

    Would love some ideas.  Thanks

    #237412 Reply
    Avatar jhwkr542
    Participant
    Status: Physician
    Posts: 1339
    Joined: 02/15/2016

    Through work? Are you sure it wasn’t a Roth 401k or 403b?

    #237420 Reply
    Avatar YIFP
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/22/2019

    He says it just says “Roth”

    #237426 Reply
    Avatar jhwkr542
    Participant
    Status: Physician
    Posts: 1339
    Joined: 02/15/2016

    Yeah, i would definitely check with hr what kind of plan it is. I’m guessing that just means Roth contributions to a 401k or 403b. You’re probably fine and can keep contributing. Max yearly amount in these accounts is $19k if under age 50.

    #237442 Reply
    Avatar Peds
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016

    An IRA is individual. Therefore I cannot be done through work.
    If it was a r401k, That’s a different conversation

    #237443 Reply
    Avatar YIFP
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/22/2019

    Clarity achieved:

     

    It is a Roth 401k.

    So essentially he split his contribution into before and after tax (he thought he was doing “additional”.)  He had not talked with me about this.

     

    Now we are trying to figure out what to do with it.

     

    #237485 Reply
    Avatar G
    Participant
    Status: Physician, Small Business Owner
    Posts: 1905
    Joined: 01/08/2016

    “Now we are trying to figure out what to do with it.”

    Research here and on main blog. But the answer is probably ‘ nothing’ with the prior contribution and ‘it depends’ with future ones.

    #237486 Reply
    Liked by jfoxcpacfp
    Avatar Peds
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016

    Nothing but you guys make 300k, so probably would tell him put it back to all traditional.

    #237490 Reply
    Faithful Steward Faithful Steward
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 519
    Joined: 06/12/2017
    First, I think there’s a distinct possibility that your spouse is contributing to a deemed-Roth account inside their employer retirement plan. In that case, there is no income limit on contributions.
    However, if that is not the case, here are answers to your questions:

    Can we roll over to a taxable account (within Vanguard?)

    Click to expand…

    Terminology is important here. You want to recharacterize, not rollover.

    Is this the time for a “Backdoor Roth”?

    Click to expand…

    Yes. If you exceed the income limit on Roth contributions, you need to begin doing Backdoor Roth IRA.

    After you recharacterize the existing contributions to the Roth into a non-deductible Traditional IRA, you can make additional contributions up to the annual limit. Then, at some point, and it doesn’t have to be in the same calendar year, you can convert the non-deductible Traditional IRA funds into a Roth IRA. At that time, you’ll owe taxes on the gains.

    Please make sure, before you start Backdoor Roth, that you will not run afoul of the pro-rata rule.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #237562 Reply
    Faithful Steward Faithful Steward
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 519
    Joined: 06/12/2017
    An IRA is individual. Therefore I cannot be done through work.

    Click to expand…

    You’re probably correct, that this is a deemed-Roth account in the 401(k). However, there are some employers that allow employees to establish Traditional and Roth IRAs with payroll deduction for the contributions. It’s not very popular, but it does exist.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #237564 Reply
    Liked by Peds
    Avatar Peds
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016
    It’s not very popular, but it does exist.

    Click to expand…

    weird.

    #237569 Reply
    Avatar YIFP
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/22/2019

    I got it somewhat sorted out:

    His employer allowed him to essentially contribute pre or post tax.  He thought he was doing “extra” contributing to Roth when in reality it was just taking away a portion of what he would have contributed to 401k.

     

    Future contributions to Roth cancelled. Still trying to figure out what to do with the $ inside but not an emergency, may just leave it.

    thanks for all of your help!

    #237770 Reply
    Avatar Peds
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016
    Splash Refinancing Bonus

    Nothing, leave it.

    #237777 Reply
    Avatar GPGP
    Participant
    Status: Physician
    Posts: 202
    Joined: 05/02/2017

    I did this too – contributed a few thousand to a Roth 401k when I should have stayed all traditional 401k. (Pre-WCI)

    My HR said this couldn’t be undone. Worth talking to them to confirm but it’s not a big deal.

    #237828 Reply
    jfoxcpacfp jfoxcpacfp
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8368
    Joined: 01/09/2016
    Future contributions to Roth cancelled. Still trying to figure out what to do with the $ inside but not an emergency, may just leave it.

    Click to expand…

    Very doubtful you’ll be able to change to a pre-tax contribution. This is done through payroll withholding and it would be too much extra work for one person to go back and change. Client told me yesterday that he asked for this change and was told “no” and this is a very small business, mostly family-owned.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #237830 Reply

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