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Did I make a mistake with Roth IRA contributions?

Home Tax Reduction Did I make a mistake with Roth IRA contributions?

  •  jbmitt 
    Participant
    Status: Other Professional, Spouse
    Posts: 49
    Joined: 07/14/2017

    Long story short, we moved for my fiancée’s job, I went back to school full time and I thought I had everything sorted out for my taxes, but apparently not.  Since we’re not getting married until this summer, I thought I’d take advantage of my minimal income for 2018 and make my Roth conversions.  I’ve typically done my own taxes, but this year I might need professional help.  I’m waiting to ballpark her taxes before making a decision.

    At employer 1 in 2018 I earned $14,300.25, however, I directed $12,819.45 of towards my 401k and Roth 401k options at work.  Employer 2 was minimal, therefore my w2s show roughly $1,500 in wages.  In December, I converted $51,338.67 in traditional IRA funds to Roth and made an estimated federal tax payment of $5000.  I also contributed $5500 to a ROTH IRA based on what I believed to be earnings of $14,300.25

    Now, I punching in numbers to TurboTax and it doesn’t like my Roth contributions as they are in excess of my income.  I double checked the IRS publications and it refers to ‘taxable compensation’.  Did I screw up?

    It looks like I have a couple of options:

    • I can convert from Roth to Traditional, but this doesn’t appear to be helpful because the ‘taxable compensation’ figure will still be less than my contribution.  The Fidelity page does suggest that qualified education expenses are not subject to a penalty.  I will have more of those coming up and I have 1098-T from last year showing $26,480 in tuition expenses.
    • I can withdraw the excess Roth contribution and pay a 10% early withdrawal penalty on the earnings.  I’m not really excited about this, but I just realized that I didn’t invest the money until 1/31/19.  The purchase lot shows a value of $5,496.59 on a cost basis of $5,500.40.
    • Or I can pay a 6% excise tax ~ $240 until it’s corrected.

    Does anyone have any advice or experience dealing with Fidelity in this scenario?

    Thanks

    #189805 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2510
    Joined: 01/14/2017

    You can only contribute to an IRA (traditional or Roth) based on your earnings.  Compensation is regarded as whatever is in your W2 box 1, which would be your total compensation reduced by your 401k (not Roth 401k) contributions.

    Therefore, I don’t think converting $5500 from Roth to traditional is a viable option, since you were never eligible to contribute that in the first place.  You need to withdraw the excess but based on your post it doesn’t appear that you’ll have to pay any penalty if done before tax filing deadlines.  I would never, ever, pay the 6% excise tax.  You are required to pay this every year that the excess contribution remains in your account.

    #189817 Reply
    Liked by jbmitt
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6697
    Joined: 01/09/2016

    You have until 4/15/19 to remove the overcontribution without penalty or excise tax, so go ahead and take out the excess.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #189828 Reply
     jbmitt 
    Participant
    Status: Other Professional, Spouse
    Posts: 49
    Joined: 07/14/2017
    Splash Refinancing Bonus
    You can only contribute to an IRA (traditional or Roth) based on your earnings.  Compensation is regarded as whatever is in your W2 box 1, which would be your total compensation reduced by your 401k (not Roth 401k) contributions. Therefore, I don’t think converting $5500 from Roth to traditional is a viable option, since you were never eligible to contribute that in the first place.  You need to withdraw the excess but based on your post it doesn’t appear that you’ll have to pay any penalty if done before tax filing deadlines.  I would never, ever, pay the 6% excise tax.  You are required to pay this every year that the excess contribution remains in your account.

    Click to expand…
    You have until 4/15/19 to remove the overcontribution without penalty or excise tax, so go ahead and take out the excess.

    Click to expand…

    Thank you.  I really appreciate your replies and knowledge that you shared.  It also gives me confidence that despite my screw up, I figured out my options, and they aren’t too bad.  I’ll figure out with Fidelity what I need to do to remove the over contribution.

    #189854 Reply
    Liked by jfoxcpacfp

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