• We just rolled out a huge software update for the Forum to bring us into the 20th Century. There's still a couple of kinks that we are working out. Let us know if you encounter any problems and we will have them squared away quickly.

Did I overcontribute to my traditional IRA?

LearnMS

Level 2 Member
#1
For the first time, I opened a traditional IRA with Charles Schwab and contributed $5500 back in Feb. I moved all the funds to SWPPX index fund.

I am doing my taxes now and the tax software said that only 2k of the 5.5k is IRA tax deductible based on my MAGI. Remaining 3.5k is non-deductible. Does it mean that I should withdraw 3.5k from SWPPX and move somewhere? I don't have a Roth IRA.

Thanks.
 

Craig

Level 2 Member
#2
Contact Schwab and have them recharacterize the $3.5k into a Roth IRA. You can still contribute that money, you just can't deduct it. So since you already paid taxes on that $3.5k amount, move it to a Roth and you don't have to pay taxes upon withdrawal.

To your last point, you can open as many IRA accounts as you want. Just open a Roth and then recharacterize the $3.5k.
 

LearnMS

Level 2 Member
#3
Contact Schwab and have them recharacterize the $3.5k into a Roth IRA. You can still contribute that money, you just can't deduct it. So since you already paid taxes on that $3.5k amount, move it to a Roth and you don't have to pay taxes upon withdrawal.

To your last point, you can open as many IRA accounts as you want. Just open a Roth and then recharacterize the $3.5k.
Thanks. I haven't finished doing my taxes yet. This one thing has been bothering me.

Given the market volatility, my initial 5.5k in SWPPX is currently ~4.5k now. Schwab sent me a form to fill up.

- So is that the only option I have, to move 3.5k to a roth IRA?
- Or can I move the 3.5k non-deductible part into 2018 contributions of the same traditional IRA?
- The 6% penalty is when I withdraw, correct?
 

Matt

Administrator
Staff member
#4
For the first time, I opened a traditional IRA with Charles Schwab and contributed $5500 back in Feb. I moved all the funds to SWPPX index fund.

I am doing my taxes now and the tax software said that only 2k of the 5.5k is IRA tax deductible based on my MAGI. Remaining 3.5k is non-deductible. Does it mean that I should withdraw 3.5k from SWPPX and move somewhere? I don't have a Roth IRA.

Thanks.
Contact Schwab and have them recharacterize the $3.5k into a Roth IRA. You can still contribute that money, you just can't deduct it. So since you already paid taxes on that $3.5k amount, move it to a Roth and you don't have to pay taxes upon withdrawal.

To your last point, you can open as many IRA accounts as you want. Just open a Roth and then recharacterize the $3.5k.
This might (or might not) be correct... the low MAGI is a flag though.

Thanks. I haven't finished doing my taxes yet. This one thing has been bothering me.

Given the market volatility, my initial 5.5k in SWPPX is currently ~4.5k now. Schwab sent me a form to fill up.

- So is that the only option I have, to move 3.5k to a roth IRA?
- Or can I move the 3.5k non-deductible part into 2018 contributions of the same traditional IRA?
- The 6% penalty is when I withdraw, correct?
If you have done the taxes correctly and you earned what you said you earned, then there's no way (that I can think of right now..) you should be funding a Traditional IRA in the first place.. a MAGI of $2K means you are in the 0% tax bracket, deferring out of 0% into a future one makes no sense.. that's screaming out Roth.

Roth is better than Traditional in the long run... (you seem averse to Roth which is perhaps something to look into)

IRA's (Roth or Trad) can only be funded with earned income, or spousal earned income. If your MAGI is $2k... did you earn enough income to fund an IRA?

Fixes:
If you had enough earned income.. Craig is correct, you can Rechar with no tax (no 6% penalty applies here from what I can see)
If you can do that, before you do, try adjusting TurboTax to see what going $5500 Roth and also $3500 Roth look like to your tax bill. Remember, Roth is far better than Traditional in the future, so if you can fund it today with very little impact to taxes (which may be the case) then you should do it.
Account value doesn't really matter here, if you are keeping everything inside the IRA wrapper, but you might want to ease down the risk level on 100% stock investments.
 

LearnMS

Level 2 Member
#5
This might (or might not) be correct... the low MAGI is a flag though.



If you have done the taxes correctly and you earned what you said you earned, then there's no way (that I can think of right now..) you should be funding a Traditional IRA in the first place.. a MAGI of $2K means you are in the 0% tax bracket, deferring out of 0% into a future one makes no sense.. that's screaming out Roth.

Roth is better than Traditional in the long run... (you seem averse to Roth which is perhaps something to look into)

IRA's (Roth or Trad) can only be funded with earned income, or spousal earned income. If your MAGI is $2k... did you earn enough income to fund an IRA?

Fixes:
If you had enough earned income.. Craig is correct, you can Rechar with no tax (no 6% penalty applies here from what I can see)
If you can do that, before you do, try adjusting TurboTax to see what going $5500 Roth and also $3500 Roth look like to your tax bill. Remember, Roth is far better than Traditional in the future, so if you can fund it today with very little impact to taxes (which may be the case) then you should do it.
Account value doesn't really matter here, if you are keeping everything inside the IRA wrapper, but you might want to ease down the risk level on 100% stock investments.
Hi Matt:

Let me clarify. MAGI is NOT 2k, it is definitely more than that :).

I said - I am just about ready to file taxes and based on the MAGI for 2017, the tax software suggested that I should 'at max' deduct only 2k of my total 5.5k that I contributed towards traditional IRA for 2017.

Tax SW is showing 2k as deductible and 3.5k as non-deductible. Schwab sent me a form via chat for me to fill up if I wish to.

My question is what options do I have to not trigger penalty in any which way? Some said to go ahead and withdraw 3.5k out of the account and leave only 2k in traditional IRA. Some suggested (as here) to move it to Roth. I should have known better by now, but with my travels and a week left to file taxes, I posed this question.

Thanks!
 

Matt

Administrator
Staff member
#6
Hi Matt:

Let me clarify. MAGI is NOT 2k, it is definitely more than that :).

I said - I am just about ready to file taxes and based on the MAGI for 2017, the tax software suggested that I should 'at max' deduct only 2k of my total 5.5k that I contributed towards traditional IRA for 2017.

Tax SW is showing 2k as deductible and 3.5k as non-deductible. Schwab sent me a form via chat for me to fill up if I wish to.

My question is what options do I have to not trigger penalty in any which way? Some said to go ahead and withdraw 3.5k out of the account and leave only 2k in traditional IRA. Some suggested (as here) to move it to Roth. I should have known better by now, but with my travels and a week left to file taxes, I posed this question.

Thanks!
Ah.. got it, so you are phasing out. My bad :)

Roth is an option,not sure if you've got an opportunity regarding withdrawal though... Would have to think about that further.
 

Matt

Administrator
Staff member
#7
Mulled this over a bit last night. There could be a way to get the loss out of this, but it would be so convoluted and have negative impact, so I stick with the Roth idea.

The loss route would involve:

Carving out all other IRA account money and pushing it into a 401(k) wrapper (transfer in to a current plan, if you have it).
Make the IRA for 2017 Non Deductible to generate 'basis' (but also losing the deduction).
Withdrawing the IRA, and claiming a loss subject to 2% AGI hurdle (hard to beat unless you're already close to it).
 

LearnMS

Level 2 Member
#8
Thanks Matt. So your opinion is to transfer (recharacterize) the excess contribution from traditional IRA to a Roth IRA. That too for 2017 year.

I received the form from Schwab and I plan to select - 'Recharacterizing (redesignating) a Traditional IRA contribution as a Roth contribution'. I will leave rest of the options alone (e.g. remove excess IRA etc.).

Guess I will fax this info before the tax date. And that should be all?
 

Matt

Administrator
Staff member
#9
Thanks Matt. So your opinion is to transfer (recharacterize) the excess contribution from traditional IRA to a Roth IRA. That too for 2017 year.

I received the form from Schwab and I plan to select - 'Recharacterizing (redesignating) a Traditional IRA contribution as a Roth contribution'. I will leave rest of the options alone (e.g. remove excess IRA etc.).

Guess I will fax this info before the tax date. And that should be all?
I think that's the easiest approach based on what I see here.