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Move my excess IRA contribution to employee 401k plan

Hi,

 

Recently, I realized that the MAGI my wife and I will earn this tax year (2023) would put us out of the range to contribute to a Roth IRA plan. Up to this point, I have been contributing regularly and have requested a "Remove an Excess IRA Contribution" form from my brokerage (Schwab) of all the funds for 2023. 

 

Is there any implications - tax or penalties - of taking the money I've contributed to the Roth IRA plan - now have removed - to my employers Roth 401k plan? The reason I have not been contributing to the 401k plan up to this point is because I do not have employer match so the IRA plan gave me better options in terms of investments. 

 

Any help would be appreciated. Thanks!

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1 Reply

Move my excess IRA contribution to employee 401k plan

You can't do that.  What you describe is not allowed.

 

If you have money in an IRA, you can do a rollover to a 401k, if the 401k allows rollover contributions.  However, withdrawing excess funds from an IRA is not a rollover. Once you remove the excess/unallowable contribution, its just cash in your checking account, and you can't contribute cash to a 401k, you can only make contributions by payroll deduction.

 

There are several things you could have done, but if you already requested a return of excess, you removed most of your options.**

 

**You can usually reverse an IRA withdrawal within 60 days and put the money back as if you had not removed it.  I don't know if that would be allowed for a removal of excess transaction.  If it is allowed, you have one more option, below.

 

At this point, since you have removed the Roth contribution, it's as if you never made the contribution for 2023.  The way to get that money into the 401k is by increasing your 401k contributions.  For example, if you were contributing the maximum Roth IRA amount ($541/month for under age 50), you can now contribute $1082 per month to the 401k (assuming you start July 1, since it is now June 27) and you will end up with the same amount in the 401k at the end of the year.  In fact, you can contribute up to $22,500 to a 401k for 2023, so if you can afford it, you can save more than what you were saving before. 

 

If you make contributions to a pre-tax 401k, that amount will be removed from your taxable income, so you won't pay tax on it, which will reduce your withholding.  In fact, if you want your take-home pay to drop by $1082 per month, you can probably contribute between $1240 and $1400, depending on your other income, tax bracket, and what state you live in.  Or, if your plan offers a Roth option, you can contribute the same $1082 as before to end up in the same place.

 

(Note that, depending on your 401k provider, you may find that there are fewer mutual funds to choose from, but they will likely have much lower expense ratios than the same fund available in a private IRA.  401k plans can negotiate substantially lower fees with mutual fund providers.)

 

Option #2 is to contribute the same amount of money to a traditional (tax-deductible) IRA, but don't claim the tax deduction.  Then, you do a rollover to a Roth IRA.  This what's known as a "back door Roth conversion" and it is a way to put money indirectly into a Roth IRA when you are not eligible to contribute directly.  However, the backdoor conversion only works if you don't already have pre-tax (tax-deductible) money in any IRA.  (For purposes of the IRA rollover rules, all your IRA accounts at different brokers are considered as one account.  IF you have pre-tax money in an IRA, the backdoor conversion won't work as expected.  We can discuss that later if needed.

 

Lastly, if you can reverse the withdrawal of excess, option #3 would be to contact the Roth IRA holder and "recharacterize" your 2023 contributions as being contributions to a pre-tax traditional IRA.  Again, like option #2, you don't actually take the tax deduction, and you do a backdoor conversion.  The same caveats apply. 

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