Need to back-out Roth IRA contributions?
My girlfriend and I are getting married this year at some point. We both do OK in terms of salary. Individually, I am well under the income limit for Roth contributions. But her income trips over some limit where she can’t contribute all $5000. She was only able to contribute some smaller amount. Once married, I’d think we’d trip over the limit for married couples (though that may vary year to year).
In future years, I’d imagine we’d wait until a calendar year is wrapped and then look back at the income for the previous year before making Roth contributions by tax time. But what about the current year? Until just a few months ago, I contributed to my Roth on the basis of my individual income. Will I have back-out some of these contributions? How do I go about doing such a thing?
And what about the future, once the current year is straightened out? Can we each still contribute to Roths? What is that “backdoor Roth” approach all about?
Permalink Submitted by Alan Spross on Thu, 2012-08-16 01:54
The modified AGI limit to make regular Roth contributions for joint filers is around 60% more than for single people. So you once married for 2012 you could come in under the limit, in the phaseout range for joint filers or even over the limit for any Roth contributions. Your joint modified AGI will result in the same limit for each of you for 2012.
For amounts in excess of what you are allowed there are choices:
1) Remove the excess amount only along with any earnings on that amount
2) Recharacterize the excess amount as a non deductible traditional IRA contribution and file Form 8606 to report it (each of you will have you own 8606 form).
The earnings calculation for either of the above actions is figured by the IRA custodian. You will just ask them or fill out their form asking them to make the correction you choose from the above two choices. The choice can be different for each spouse. For example, if one of you already has made non deductible TIRA contributions, using choice 2 will not result in a major change, it will just add to the already existing balance of non deductible contributions.
Note that while unlikely, if neither of you is covered by a retirement plan at work, if you choose Option 2, you can deduct the TIRA contributions. The amount of earnings on your contributions is also a factor in making the above choice. If you have real good gains, you would tend toward Choice 2 to eliminate current tax and penalty on the earnings that would be removed under Choice 1.
Reporting the above choices is somewhat different, but not difficult. You could post again later once you make your choice on how to report it and what forms you will receive from the custodian.
A ‘back door Roth” involves making the non deductible contributions to a TIRA initially to avoid any income phaseout issues. If you have no other pre tax IRAs, you can then convert the non deductible IRA to a Roth IRA and pay no taxes, except on any small amount of earnings. But if you do (either of you) has pre tax IRA balances already, then that spouse’s conversion will be mostly taxable. But if you do not have pre tax IRA accounts, using this approach will be advisable for 2013.