Roth IRA income limits

[dubosea4]

I have a Roth IRA and several sources of income and I came perilously close to the 2021 Roth IRA contribution upper income limit.  Based on my current forecast, I will exceed the limit for 2022 but I won't really know until around November when my year-end forecast will be mostly actual data.  Since I have already funded the Roth IRA for 2022, and I'm over 59 1/2, how will my contributions be treated if I end up exceeding the upper income limit.

[JulieS]

If you contribute more to your Roth IRA than you are allowed, you can contact the trustee of the account, explain your situation and have the excess plus earnings withdrawn.

You have until the tax deadline in 2023 to do this for 2022, but if you can withdraw the excess before the end of 2022, you will avoid getting a 2023 1099-R to report it. 

You don't have to figure the earnings amount, your trustee or broker will do that for you. 

If you leave the excess in the account, you will be charged a penalty of 6% of the excess every year until you withdraw the excess. 

Here is a good explanation of how to report this in TurboTax. 

[dubosea4]

My concern is more about exceeding the modified adjusted gross income (MAGI) for tax year 2022 which I understand is $144k.  I currently project my MAGI to be between $142k - $150k.  If it ends up being $142k this is a non-issue, but I am currently tracking towards $146k, which would exceed the MAGI limit of $144k.  How will my tax liability be calculated if my forecast is accurate?

[Mike9241]

Not exactly sure what you are asking. since a Roth Contribution doesn't affect your taxable income, it doesn't affect your taxes. you will pay more in taxes of $146k than $142k but even if the law was changed to raise the MAGI limit for a ROTH your taxes wouldn't change.  in any case, there is no rush to see if you can make a ROTH contribution. you have until the original due date of the return and its possible to do year-end tax planning to keep your MAGI within the Roth limits

[dmertz]

For 2022, above $129k of MAGI for the purpose your maximum permissible Roth IRA contribution will be less than the full annual limit.  With a MAGI of $142k your maximum Roth IRA contribution will be limited to $800 if under age 50 or $933.33 if over age 50, and your maximum permissible contribution will be zero if your MAGI is $144k or over.

See the post made by JulieS for a description of the penalty (excise tax) for making an excess contribution and the method for correcting the excess to avoid the penalty.  Note, however, that if you make a corrective distribution and your investment has gains that are required to accompany the amount being returned, the gains will also be taxable on your 2022 tax return, raising your MAGI and, if your MAGI was below $144k without this distribution, you'll have even more of an excess contribution and you may need to do an iterative calculation to determine the full amount that needs to be returned to completely eliminate the excess.  It's an annoying consequence of your MAGI being in the phase-out range for Roth IRA contributions.

[dubosea4]

Thanks for the guidance.  I think what is confusing is that I'm focused on potentially exceeding the income limits vs excess contributions.  My understanding is that for tax year 2022 the MAGI ceiling to contribute to a Roth IRA is $144k for a single person which I have historically not reached.  So, if I don't exceed any Roth IRA contribution limits but because of unexpected income at the end of the year have a MAGI of $150k, which exceeds my ceiling, what does the IRS do and what should I do?

[Critter-3]

 You are not taking into consideration the phase out range for the ROTH contribution ... it is from 129K to 142K as already mentioned in the prior post.  It is a phase out not a "cliff" in tax terms so your contribution is already limited and may be completely un allowed  so going forward WAIT to make the IRA contribution until you know how much will be allowed  OR  if you have nothing in a traditional IRA you can make a non deductible contribution then convert it immediately to a ROTH using a trick called the "Backdoor" contribution. 

[dmertz]

If your MAGI is $150k in 2022, any Roth IRA contribution you make for 2022 is an excess contribution because your MAGI results in your contribution limit being reduced to zero.  The consequences of an excess contribution have already been explained.

If your MAGI is $129k or below, your contribution limit is $6,000 or $7,000 depending on your age.  From a MAGI of $129k through $144k that limit linearly reduces to zero.