2024 Roth IRA Contribution question

Yes, your contribution limit is based on your 2024 income.  That is one of the reasons that you have until April 15, 2025 to make a contribution designated for 2024 -- so you know exactly what you are allowed to contribute.  

 

Alternatively, if you contribute now and it is too much, you can either withdraw a portion of the contribution tax-free (all withdrawals of Roth IRA contributions are tax-free) or you can recharacterize the contribution as a contribution in a traditional IRA.  Then you can do a backdoor Roth IRA conversion, assuming you do not have any funds in a traditional pre-tax IRA.  If you do have pre-tax funds in a traditional IRA, your options are a bit more complicated but a recharacterization is still allowed. 

Thank you for the information.

 

Since I will use 2024 income, I wont be able to contribute to my Roth IRA unfortunately. 

 

Playing with the Fidelity Contribution Calc, it mentions I would be able to contribute the full amount in a Traditional IRA. Does that sounds right?

 

Thanks again.

 

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@TheCryptoProbie wrote:

Thank you for the information.

 

Since I will use 2024 income, I wont be able to contribute to my Roth IRA unfortunately. 

 

Playing with the Fidelity Contribution Calc, it mentions I would be able to contribute the full amount in a Traditional IRA. Does that sounds right?

 

Thanks again.

 

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Yes, however...

 

You can always contribute to a traditional IRA, you can't always take a tax deduction.  It depends on your filing status, income, and whether you or a spouse has a retirement plan at work.

https://www.irs.gov/retirement-plans/ira-deduction-limits

 

If you can't deduct the contribution, you can still make one.  That means you are adding non-deductible (already taxed) money into what is normally a pre-tax IRA.  You get a form 8606 as part of your tax return. Keep this as long as you have your IRA, plus 6 years.  This is an exception to the rule that you can discard most tax papers after 3 or 6 years.

 

Now, several things can happen.

 

1. If you leave the non-deductible money in the IRA, it will grow tax-free.  When you retire, as long as you saved your form 8606s, you don't have to pay tax on the money again.  For example, suppose you have a balance of $100,000, of which $6000 is non-deductible.  Since 6% of the money in the IRA was already taxed, you only pay tax on 94% of the withdrawal.  You continue to use form 8606 to track the remaining non-deductible basis in your IRA. 

 

2. If you have no pre-tax money in ANY traditional IRA, you can immediately convert the money to a Roth IRA.  This is the "backdoor Roth IRA" strategy, you make a non-deductible contribution, then convert it.  Normally you pay tax on conversions but since this is non-deductible and already taxed, the conversion is tax-free.  Two steps to get the money into a Roth instead of one step.  (And note, this only applies to traditional IRAs, not pre-tax work plans like 401ks.  You can have a pre-tax work plan and still do a backdoor Roth IRA as long as you don't have pre-tax (deductible) money in a traditional IRA.

 

3.  If you already have deductible (pre-tax) money in any IRA (they are all combined for this calculation), and you still want to convert to a Roth, you have to use the pro-rata rule.  For example, suppose you have a traditional IRA balance of $100,000, of which $6000 is non-deductible.  If you were to convert $10,000 to a Roth IRA, you would pay tax on 94% of the conversion and 6% would be tax-free.  Your IRA balance would now be $90,000 with $5400 being after-tax.  You can gradually convert your IRA to a Roth IRA, and eventually you will get to the point where your IRAs are empty.  This is tough because if you are in a high income bracket, you will pay a lot of tax on the conversion, so it does not always make sense to do this.