ROTH IRA eligibility question
I opened a ROTH IRA account in July 2021 with Fidelity. I contributed $6K in July 2021. I worked 6 months as an independent contractor (self-employed) and 6 months as an employee in the calendar year of 2021. My 2020 income was below the Roth IRA Income Limits for 2020 but my 2021 income was above the Roth IRA Income Limits for 2021.
By the time I opened my IRA account with Fidelity, I didn’t know how much I would earn in the whole year of 2021 and they only asked about my 2020 income, so I successfully opened the ROTH IRA account using my 2020 income information. I thought as long as my 2020 income was below the ROTH IRA income limits, I can contribute up to $6K in the ROTH IRA. However, recently when I was doing my tax filing for 2021, I found that my eligibility to contribute to a ROTH IRA probably should depend on whether both my 2020 income and 2021 income were below the income limits (based on this article: https://www.schwab.com/ira/roth-ira/contribution-limits).
My question is: Does my eligibility to contribute to the ROTH IRA in July 2021 depend on my 2020 income only (only requires that 2020 income below the income limits) or 2020+2021 income (both 2020 income and 2021 income must be below each year’s income limits)?
If the eligibility should be based on both 2020 and 2021 income and my 2021 income was above the income limit, does that mean all my $6K contribution are over-contribution? And what should I do to correct it? Should I pull everything out from my Fidelity account now? Yesterday I called a TurboTax expert to ask but was told that I shouldn’t take it out. I don’t believe that’s true and I think I can at least withdraw my principal, correct? By far I didn’t receive any penalty notice. Fidelity only sent me a form 5498. I am wondering if I need to take any action to minimize the penalty (if any).
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-11 21:38
In July 2021 the only year for which you could make a contribution was 2021. As such your 2020 income is immaterial but your 2021 income determines if you were eligible for a 2021 contribution. Since your 2021 MAGI was too high, you have an excess contribution. If you were only slightly over the limit, you may be allowed a partial contribution, but Ttax should tell you if your entire contribution was excess or only a portion of it. If you request a removal of the excess amount by 10/15/2022 (providing you either file your 2021 return or an extension by 4/18) you will avoid an excise tax, but any gains returned with the excess contribution will be taxable and subject to penalty on your 2021 return.
Permalink Submitted by Grace L on Mon, 2022-03-14 17:40
Got it! Thank you so much for your reply! I really appreciate it.