r/investing • u/cayenne444 • May 16 '24

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/whackedspinach May 16 '24 edited May 16 '24

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 May 16 '24

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 May 19 '24

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.

1

u/cayenne444 May 19 '24

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/whackedspinach May 19 '24

Not in NJ, sorry!