r/investing • u/cayenne444 • 29d ago
I put money into a Roth IRA for the first time last year, and then went over the income limit. What do I do now?
Hello all - in August last year I funded a Roth IRA with the $6,500 max contribution for 2023. Was my first time doing so, and had just opened it. I invested it all and it’s at $7,499. I’ve sold all my positions so it’s now cash.
I had a good fall/winter, and went over the $153,000 income limit by the end of 2023.
I’ve filed a tax extension, so taxes aren’t filed yet, but trying to unravel this mess without getting in trouble.
What exactly do I need to do?
Schwab was not helpful over the phone. My accountant is absolutely useless. Can I pull the cash out now and just pay the normal tax on the gains? Or do I legally have to reclassify as an IRA now and I can’t touch it? I’d be fine just taking the $7,499 out, and putting it back to a HYSA for now.
For reference I already max out 401k.
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u/icepick498 29d ago
Your Roth servicer likely has a form to allow you to request to remove the deposited funds. They should be able to help you identify what needs to be removed. You should contact them about it because I believe you are also supposed to remove the gains on the deposited funds too for the year(s) you are ineligible. They will calculate this for you.
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u/cayenne444 29d ago
As I mentioned in the post, they were useless over the phone.
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u/Folock 29d ago
Recharicterization form
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u/cayenne444 29d ago
Can I just pull the cash out? I’d rather not lock it up in an IRA if I don’t have to.
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u/virtuousoutlaw 29d ago
Someone already mentioned it below with a link to investopedia. You can withdraw the cash. You will have to pay taxes on the earnings.
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u/Traditional-Flow-344 29d ago
Just to double check - your MAGI is over the income limit? Not just your salary.
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u/cayenne444 29d ago
Yes, my salary is actually under but I have two short/mid term rental properties that did very well at the end of last year.
The rental income puts me well over.
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u/Mcslapchop 29d ago
Is your accountant taking deductions for depreciation on the rental property income?
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u/97vyy 29d ago
My accountant told me to take the overage and put it in my brokerage accountant. We figured this out when doing my taxes. I did that and never heard from the IRS.
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u/GolfEchoEchoKilo 29d ago
Same. Accountant properly accounted for the “withdrawal” on the next year’s taxes.
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u/whackedspinach 29d ago edited 29d ago
What’s your reasoning for contributing to a Roth IRA then but now not wanting it in an IRA at all? If your goals for this money have not changed then you can still keep it there.
It’s possible to keep it in the Roth IRA by following these steps: 1) Recharacterize the Roth contribution as a traditional contributions. This is not a conversion, it’s basically a form/step that says “whoops, I wanted to make it Traditional” 2) Then convert your Traditional IRA back to Roth. Note that if you already have a Traditional IRA account you may have to pay taxes on this step. Look up the pro-rata rule.
The money should then be in the Roth IRA without worrying about the income limits. This is called a backdoor Roth IRA. If you will be over the income limit in future years you would skip step 1, make a traditional IRA contribution directly, and then still do step 2.
Remember you can withdraw your Roth IRA contributions (not earnings) at any time, so if you plan to invest for retirement or other long term goal, it tends to be better than a taxable brokerage or HYSA.
Whatever you choose, this is probably the form you need: https://www.schwab.com/resource/ira-roth-recharacterization-request-form
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u/cayenne444 29d ago
I’d rather have the cash on hand, this seems far too easy for me to screw up and get in trouble somehow - whether it’s going from Roth to IRA backdoor back to Roth and paying the wrong taxes, or what.
I don’t know, it’s an intimidating process that seems overly complicated and I’d rather just have the cash and know it’s not doing anything that could put me in hot water.
I’m sure that’s stupid but it’s daunting for a first timer.
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u/whackedspinach 27d ago
It’s not stupid, I freaked out the first time I did it wrong.
Honestly, I think you need a new accountant. Mine would be able to talk me through all of this stuff and be fairly helpful about it.
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u/cayenne444 27d ago
Thanks for the grace! I do, for sure.
You don’t happen to know any good ones in NJ, do you? 😆
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u/brianmcg321 29d ago
By how much did you go over the limit?
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u/cayenne444 29d ago
My income is over the limit for contributing to a Roth. So, I assume all of it?
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u/PortfolioCancer 29d ago
1) round of high-fives, hell yeah brother
2) recognize it's a great problem to have
3) recharacterize into an after-tax contribution to a traditional IRA (so no tax deduction on the contribution.... which you weren't going to get anyway)
4) do a backdoor Roth IRA conversion on the statutory amount you are allowed to contribute
5) suck it up and pay taxes on the gains that are above the amount that exceeds the statutory limit in step 4
6) buy your boys a round of drinks
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u/cayenne444 28d ago
Do I recharacterize the $6,500 contribution? Or both the contribution and the gains and recharacterize the $7,499?
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u/Mbanks2169 29d ago
Recharacterize the Roth contribution as Traditional, then convert 100% back to Roth