Status of Roth IRA contributions if new job mid-year offers 401k

[NSTR]

I contributed $1500 into a Roth IRA from Jan-June 2021. In July 2021 I will begin a new job that offers 401K with matching benefits. My income for 2021 will now be large enough that I won't qualify for Roth IRA contributions. Do my Roth IRA contributions for this year become "Excess?" If I withdraw the Excess Contributions this year and pay the taxes and penalties, am I free and clear to max out my 401K contributions for 2021. Do I have other options or considerations on what to do with the 6 months of Roth IRA contributions so that I can still max out my 401K contributions? Thank you.

[macuser_22 · Accepted solution]

IRA contribution are independent of 401(k) contributions and one does not affect the other.

Your gross income determines if Roth IRA contributions are excess.

Any excess plus any earnings attributed to the excess must be removed before the 2021 due date (Apr, 15, 2022) to avoid any penalty.     Ask the IRA custodian for a 'return of contribution plus earnings" - do not just remove it yourself with a normal distribution or the resulting 1099-R will not be coded as a return of contribution and have the earnings (if any) in box 2a.

[NSTR]

Thank you for the prompt reply and the clarification. My account custodian sent me the wrong form which I would have missed had you not replied with the specific information. 

[Opus 17]

The only taxes and penalties on the Roth IRA will be on the earnings, not the original contributions.

Your Roth IRA contributions will be in "excess" if you enroll in the 401(k) regardless of how much you actually contribute, so you might as well put as much money in the 401(k) as possible.  If you like the idea of a Roth IRA, you can ask the plan administrator if the 401(k) offers a Roth option.  The difference between a Roth IRA and a Roth option in a 401(k) is that you can withdraw contributions from the Roth IRA at any time, but you can only withdraw contributions from a 401(k) after you separate from service. 

I would like to know how to go from unemployed to making $250,000+ per year!

Remember that your Roth eligibility is determined by your gross income on your tax return, not your annual salary.  So for 2021, even if your new annual income is over the Roth limit ($196,000 for MFJ or $124,000 for single) but you will actually be paid less than those amounts because the job started mid-year, you would still be eligible to fund your Roth IRA for this year. 

https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that...

[macuser_22]

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@Opus 17 wrote:

Your Roth IRA contributions will be in "excess" if you enroll in the 401(k) regardless of how much you actually contribute,

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Having a 401(k) has nothing do do with limits on Roth IRA contributions, only the MAGI does.

Having a 401(k) can affect the deductible amount of a Traditional IRA, but not a Roth IRA.