Penalty for Roth IRA investments?

Question

Hi guys,

Lets say a person puts money into a Roth IRA, but then few years later, IRS penalizes this person because this person was making too much money. What would that penalty look like?

In 2019 I believe for a single person max income limit was 139K..

With my job and all the investments I am afraid what if I am making more than 139K in MAGI (Modified Adjusted Gross Income)? I am not an accountant so I am afraid that I may make a mistake in calculating MAGI not not knowing about it  and      later on the IRS will penalize me for investing into Roth IRA. So if that happens, what kind of penalty does the IRS put on people?

Thank you!

Carl Fischer · Answer

@Mary Jay

The contribution would be considered an “excess” contribution which would be taxed at 6% each year until it was withdrawn.

Your cpa should be able to give you your MAGI. You can take your contribution out before you file your return. @Aaron K. has the right approach -know ahead of time. Yes you can make a contribution to a traditional Ira and then convert it to a Roth. In the vernacular it is known as a “Backdoor” Roth IRA. As @Mark S.suggested.

Mark S. · Answer

@Mary Jay, no problem.

1.) Technically, these are conversions (not rollovers).  You can do multiple conversions

2.) 401(k) will not affect your ability to do what you’ve mentioned - which is to ultimately get money into your Roth IRA regardless of your income.

Google back door Roth IRA and/or Roth conversions.  For extra credit, research IRA aggregation rules regarding Roth conversions.

Mary Jay · Answer

Thank you so much to all of you guys! I really appreciate your help!

Mary Jay · Answer

Thank you so much!

John Teachout · Answer

While I don't use one, I think a financial planner could help you in your situation. It would probably be worthwhile as it seems like you have the funds but not a good grasp of how to best handle them to achieve the greatest benefit.

Mary Jay · Answer

Thank you so much! I appreciate your help!

Mark S. · Answer

@Mary Jay, you have until the tax deadline each year to contribute for the prior year.  You can do this each year.  Google is your friend.  Good luck.

Mary Jay · Answer

Thank you so much for your help!

One more question, these transfers, should I do them every year before the end of the year, or whenever?

Is there some kind of rule on that?

Because I would like to contribute yearly to Roth IRA, if possible

Mary Jay · Answer

Thank you!

1) Can you roll over from Traditional IRA to Roth IRA periodically ? Or is it kind of like a one time deal?

I feel like I may need to do those roll overs more than couple of time per my life time. Is it allowed?

2) Also, I have a 401K at work, so I would have to do a rollover from my 401K as well later on, hopefully roll overs from traditional IRA wont prevent a rollover from the big roll over from 401K when I quit my job?

Mark S. · Answer

@Mary Jay, assuming you don’t have any other pretax (Traditional) IRAs, you might consider making a non-deductible Traditional IRA contribution followed by a Roth IRA conversion (ideally leaving the money in cash within the Traditional IRA until it hits the Roth IRA).  This way you don’t have to worry about whether or not you make “too much” to contribute directly to a Roth IRA.  If you already have pretax IRA assets (not 401(k) or other employer-sponsored plans, just IRAs), then it gets a tad more complicated.

Penalty for Roth IRA investments?

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