@GreenCloud wrote:
Thanks for responding .
Married, filing jointly with an income of 140K. I may qualify for contributing to Roth IRA. My question is around withdrawing or keeping the money this year's contribution from the Traditional IRA.
You can "cancel" or reverse the IRA contribution by contacting the bank. This is not a normal withdrawal, you probably need to send them a special form. You will have to remove both the excess contribution and any earnings. Your deadline to do this is the tax filing deadline (normally, April 15, 2022). If you withdraw the excess and the earnings in 2021, the money will be added back to your taxable income (you don't take the deduction) and the earnings will be taxable in 2021. If you waited until after January to withdraw the excess contributions, you would still pay the tax in 2021 (because you don't take a deduction) but the earnings would be taxed on your 2022 return (if they weren't withdrawn until 2022).
Based on your income, you have a second option. You may "recharacterize" your IRA contribution as a Roth IRA contribution. You don't get the tax deduction this year, but you do get the benefit of leaving the money in a retirement account for the long term, and you don't pay taxes when you withdraw the money after reaching age 59-1/2. If you recharacterize the contribution as a Roth IRA, you leave the earnings in the Roth account and they are not taxed either. The deadline to recharacterize your contributions is also the tax filing deadline.
Whether you withdraw or recharacterize the money depends on your financial need and how much you want to save. If you don't need the money, you may want to leave it as a Roth IRA. If you leave it in the traditional (deductible) IRA, the IRS will eventually assess tax and a penalty, so you will want to fix this one way or the other.
Finally, at your income level, your spouse may also contribute to a Roth IRA in their name, even if they don't work (they can rely on your earnings to make a contribution into an account in their name). There are no "joint" IRA accounts, each account is owned by a single individual. But your spouse can make "spousal IRA" contributions in their name even if they don't work, as a way of increasing your overall savings potential.
