Roth IRA exceed allowed contribution if married file jointly

[superlyc]

Hi, I contribute to the roth ira because my individual income is less than $138,000. But I realized that if I want to file jointly, our total income is more than $218,000. How can I fix this?

[Anonymous_]

I'll page @dmertz 

[dmertz · Accepted solution]

Because you've made an excess Roth IRA contribution, you'll need to either obtain an explicit return of contribution from the Roth IRA or request that the IRA custodian recharacterize the Roth IRA contribution to be a traditional IRA contribution instead, otherwise you'll have a 6% penalty on the excess each year until the excess is corrected.

[Mike9241]

the traditional IRA also faces a phase-out if you are covered by an employer retirement plan phase-out MFJ $116 - $136K

if you are not covered but your spouse is covered by an employer retirement plan the phase-out is $218K -$228K

[dmertz]

The traditional IRA phase out is for a deduction, not for the contribution.

[superlyc]

But I read that people can still contribute to IRA with after-tax money and convert to Roth through backdoor. Does the "phase out" only apply to pre-tax money?

[superlyc]

The institute told us we can correct it before the tax filing date. So in that way, we should be avoiding the penalty, right?

[dmertz]

The first reply that I made gave the options to correct the excess Roth IRA contribution by the due date of your 2023 tax return, including extensions.

Between the lower threshold and the upper threshold the amount of an traditional IRA contribution that you are eligible to deduct goes down as your modified AGI for the purpose goes up.  A Roth conversion from a traditional IRA can be any amount and the taxable amount will be calculated on Form 8606 based on the amount of your distributions from traditional IRAs, the amount you have left in traditional IRAs at year-end and the amount of basis in nondeductible traditional IRA contributions you have in your traditional IRAs.

[Opus 17]

---

@superlyc wrote:

The institute told us we can correct it before the tax filing date. So in that way, we should be avoiding the penalty, right?

---

You have until April 15, 2024 to remove or otherwise correct the issue.  

One option is to remove the excess Roth contribution.  If the contribution had earnings, you must also remove the earnings.  The contribution is treated as if it was never made, and the earnings are taxable on your 2023 return (even though you will receive the money in 2024), and the earnings will be subject to a 10% penalty for early withdrawal unless you are over age 59-1/2.  The deadline for removing the excess contribution is April 15, 2024.  (That is, you avoid the 6% penalty for excess contributions, but the earnings are still subject to a 10% penalty for early withdrawal.)

The other option is to recharacterize the Roth IRA contribution as a contribution to a traditional IRA.  The contributions and its earnings will be considered to be contributed to a traditional IRA.  (This can be at the same broker or a different broker, but you need to do this electronically, so if at 2 different brokers, they both need to know in advance that you are planning this.).  The recharacterization deadline is also April 15, 2024.

Since your income will not allow you to take a tax deduction for the IRA contribution, you will have some non-deductible money in the traditional IRA.  If you have no other money in any traditional IRA accounts, then after the recharacterization, you can do a tax-free conversion from the traditional IRA to a Roth IRA (this is the "backdoor" Roth contribution option).  

However, if you have any pre-tax or tax-deductible balance in any traditional IRA, then mixing pre-tax and after-tax money in a traditional IRA creates extra paperwork for you, and any Roth conversion will be partly taxable.  We need to discuss that in more detail before you do it, and you might find it simpler to just remove the excess contribution to the Roth and invest it someplace else.  

(Note that whenever I say "you do this" or "you must have no other money in a traditional IRA", the you is the account owner.  There are no joint IRAs, so if spouse A and spouse B each have an IRA, then spouse A's contributions or conversion option are determined by spouse A's other accounts, and spouse B's options are determined by spouse B's other accounts.)