Surprise Capital Gain Throws Wrench in Roth IRA Contribution - What Now?
Unexpected windfall? Don't let it derail your Roth IRA plans! This Ask the Hammer episode tackles a common dilemma: what to do if a sudden capital gain pushes you above Roth IRA income limits after making a contribution.
Key Takeaways
- Capital gains from property sales are included in modified adjusted gross income (MAGI) for Roth IRA eligibility purposes, even though they're taxed at a lower rate—so a $150,000 gain counts fully toward the $218,000 income threshold for married couples
- Remove excess Roth IRA contributions by October 15th of the following tax year (along with any earnings) to avoid penalties entirely
- Alternatively, recharacterize a disqualifying Roth contribution to a traditional IRA by October 15th; it may be non-deductible depending on whether you or your spouse participate in an employer-sponsored retirement plan
- Unlike Roth conversions, Roth IRA contribution recharacterizations are still allowed post-2018 specifically to address situations where early-year contributions turn ineligible due to later income
Surprise Capital Gain Throws Wrench in Roth IRA Contribution - What Now? Ask The Hammer: Unexpected windfall? Don't let it derail your Roth IRA plans! This Ask the Hammer episode tackles a common dilemma: what to do if a sudden capital gain pushes you above Roth IRA income limits after making a contribution. Learn two key strategies to fix the situation: withdrawing excess contributions or recharacterizing them to a traditional IRA. Plus, discover potential loopholes like solo Roth 401ks. Get the scoop on modified adjusted gross income, contribution deadlines, and more. Tune in and keep your retirement savings on track, even with life's curveballs!
The eligibility to contribute to a Roth IRA is subject to income limits set by the Internal Revenue Service (IRS). These income limits determine whether an individual can make contributions to a Roth IRA and, if so, the amount they can contribute.
For the tax year 2022, the income limits for contributing to a Roth IRA are as follows:
- Single filers:
- Full contribution allowed for individuals with modified adjusted gross income (MAGI) of up to $144,000.
- Contributions are phased out for individuals with MAGI between $144,000 and $154,000.
- Individuals with MAGI above $154,000 are not eligible to contribute to a Roth IRA.
- Married filing jointly:
- Full contribution allowed for couples with MAGI of up to $214,000.
- Contributions are phased out for couples with MAGI between $214,000 and $224,000.
- Couples with MAGI above $224,000 are not eligible to contribute to a Roth IRA.
For the tax year 2023, the income limits for contributing to a Roth IRA are as follows:
- Single filers:
- Full contribution allowed for individuals with MAGI of up to $147,000.
- Contributions are phased out for individuals with MAGI between $147,000 and $157,000.
- Individuals with MAGI above $157,000 are not eligible to contribute to a Roth IRA.
- Married filing jointly:
- Full contribution allowed for couples with MAGI of up to $222,000.
- Contributions are phased out for couples with MAGI between $222,000 and $232,000.
- Couples with MAGI above $232,000 are not eligible to contribute to a Roth IRA.
It's important to note that these income limits apply specifically to contributions to Roth IRAs. Individuals who exceed the income limits may still be able to contribute to a traditional IRA and then convert it to a Roth IRA through a backdoor Roth IRA strategy, although there may be tax implications associated with this approach. Additionally, Roth IRA income limits are subject to change, so it's advisable to consult with a tax advisor or financial planner for the most up-to-date information and guidance regarding Roth IRA contributions.
Watch the full video “Surprise Capital Gain Throws Wrench in Roth IRA Contribution - What Now?” for more details! Catch all of the Ask The Hammer episodes at this link: https://www.finstream.tv/videos/ask-the-hammer/
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