I was expecting to be eligible to contribute to a Roth IRA this year so I've been making contributions all year. Now, due to Square's stock appreciating more than expected, I'm finding myself in a situation where I'm likely to have too much income to contribute to a Roth IRA. May we all have such problems! Here are my details: - So far this year, made about $150k in income. Of that, about $135,500 is taxable. - Expecting another $27,500 in taxable base income this year. - Expecting another $30k in RSU income this year - Expecting about $31k in regular income (i.e. beyond the part that was already withheld from my paycheck) due to non-qualifying sale of ESPP shares in November. Altogether, this puts me at $224k taxable income, nearly 20k over the income limit for Roth IRAs. This is already factoring in: - Annual max traditional 401k contribution - Health insurance premium and HSA contribution. Some solutions I have considered and the reasons I don't like them are: - Recharacterize Roth contributions as non-deductible traditional and do a Roth conversion. I don't like this approach because I have a significant amount of pre-tax money in a traditional IRA from previous years and I'd be hit by the pro-rata rule. - Recharacterize Roth contributions as non-deductible traditional and don't do a Roth conversion. This is a possibility, but having pre- and post-tax money all mixed together in one account hurts my OCD brain. -Don't sell ESPP shares until next year. This would put off the 31k of income until 2021, when I was already planning to not contribute to a Roth IRA. The reason I prefer not to do this is because I have been prioritizing maximizing ESPP contributions over cash flow (considering stock appreciation, I'm glad I did this!), so my household runs at a deficit month-to-month. I don't have enough liquid cash to last until the first open trading window in 2021 to sell my ESPP shares. I really appreciate any advice here. Ideally I'd love to lower my MAGI by enough that I can just keep my Roth IRA contributions as they are, but any advice is super helpful. Thanks!
You're making enough to not be eligible for direct Roth? Just do nondeductable traditional and rechar it to Roth. You're talking a 6k limit. It's nothing over the long term
Doing a Roth conversion is one of the options I mentioned above but I'd be hit by the pro-rata rule so it's not practical.
Does square allow for an after tax 401k in addition to pre tax for the full 57k effect? If so, contribute there and then convert in plan to roth 401k. This let's you avoid the pro rata rule that applies to traditional IRAs.
Yes it does allow that. That's what my plan was for 2021. But I've already been making Roth IRA contributions this year so I'm not sure how to handle those.
You can roll over Roth IRA contributions to a Roth 401k. Not sure if this will help in your situation, but it should as long as the total Roth contributions for the year aren't above the Roth 401k limit
You may be able to roll your IRA into it 401k to avoid pro rata rule.
That's an interesting idea. Does it work if I do that in the same year that I contribute to the traditional IRA? I'd be a bit worried about the rollover to my 401k being applied on some kind of pro rata basis.
As far as I know if you have $0 in your traditional IRA by the end of the year the pro rata rule doesn’t apply.
See if a donor advised fund makes sense for you. Google fidelity charitable giving. TLDR is make large contributions to fund now and take deduction this year. Dole out contributions in later years. No tax on highly appreciated securities either.
Itemized deductions (e.g. charitable donations) don't reduce AGI.
Talk to a cpa now
You should just recharacterize to a TRA and then rollover to a Roth. I did that with Fidelity and it’s pretty straightforward on the phone
As I've mentioned above, this doesn't work for me because of pro rata rule
You can just "undo" your contribution but you also have to take any gains from it back. Talk to the brokerage where your IRS is at. There are no penalties or taxes for doing this so long as you do it before the 2020 tax deadline (generally April 15, 2021).
Contribute to the Roth 401k which has no income limits. Front loading your traditional 401k prevents you from receiving the maximum company match. Here are some readings to help explain the Roth 401k. https://rentthemortgage.com/take-advantage-of-roth-401k/ https://www.thebalance.com/are-you-eligible-to-contribute-to-a-401-k-and-a-roth-ira-2894148 https://www.financialsamurai.com/is-a-backdoor-roth-ira-for-high-income-earners-a-good-move/
Not sure why you say that. Out company match is the same whether we contribute to a Roth or Traditional 401k. Also, I'm trying to reduce my AGI so I can contribute to a Roth IRA. Contributing to a Roth 401k instead of traditional would have the opposite effect.
Donate a lot more to charity.
I donate a ton to charity but it doesn't reduce AGI. Itemized deductions are subtracted *from* AGI, so it doesn't change my IRA eligibility.