Hello,

Got married this year and realized that when next years tax time comes around we will be above the income limits for contributing to our Roth. We have been contributing to it all year, and since its almost April we have about 25% of the max contribution already in there. Since we are not allowed to contribute what will happen? Is there anyway to avoid a fee or tax from doing this? Is there anyway to switch it to a 2022 contribution instead? My wife for example didnt hit the max for 2022 so maybe we can do that?

Thanks!

Comments

nkyguy1988 t1_jeberae wrote on March 30, 2023 at 8:01 PM

Recharacterize it to tradtional contributions. Then do backdoor Roth conversions.

nothlit t1_jebf51w wrote on March 30, 2023 at 8:03 PM

https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/

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sciguyCO t1_jebg170 wrote on March 30, 2023 at 8:09 PM

>Is there anyway to switch it to a 2022 contribution instead? My wife for example didnt hit the max for 2022 so maybe we can do that?

As long as you have unused "room" in your / her allowed 2022 Roth IRA limit you can submit a request to your IRA provider to "recharacterize" your 2023 contributions to be treated as being for 2022 instead. This retroactively changes which tax year those dollars count for. You have until April 18th to change your contributions to be for 2022.

Past that, you have two main options:

Execute a "removal of excess contributions" to undo the deposit and return that money to you. Any growth those dollars may have earned also has to come out, which will be reported as taxable dollars on a 1099-R you'd get next year. You may also owe a 6% "early distribution penalty" on those returned earnings, but I seem to remember seeing that penalty has been removed when doing a removal of excess.
Execute a "recharacterization" from your Roth IRA to a Traditional. Like changing the tax year, this retroactively treats that money as having gone into your Traditional IRA instead of the Roth. There is no income restriction around adding money into a Traditional IRA each year. However if either/both of you are covered by a retirement plan through your employer, your income would likely limit your ability to deduct that contribution on your tax form.

magicray89 OP t1_jebnzva wrote on March 30, 2023 at 8:59 PM

If we have already completed our taxes for 2022 can I still recharacterize the 2023 back to 2022?.

Thanks for the advice!

sciguyCO t1_jebrtfk wrote on March 30, 2023 at 9:24 PM

Yes, you can recharacterize the tax year and not have to redo your 2022 tax return. For most people, Roth IRA contributions have zero impact on their taxes, so don't even get reported on your return.

The one exception would be if you or your spouse qualified for the "saver's credit" on your 2022 return, that's a tax credit given for you saving for retirement. But even then, an amendment would only be necessary if the extra 2022 contribution from the recharacterization increased that credit.