I have been contributing to a Roth IRA for several years, including 2023 and 2024 already. I was doing my 2023 taxes and realized I make too much money to contribute directly to a Roth IRA. Do I need to do anything to fix this?
Yes!
If you contribute to a Roth IRA without being eligible to do so, you are opening yourself up to tax penalties and potentially an IRS audit.
It’s important to note that the income requirements to contribute to a Roth IRA change over time, and differ based on tax filing status.
The charts are from this Fidelity article. These are the numbers to know if you can contribute the full amount, a partial amount, or not at all. There isn’t much wiggle room between being able to contribute fully and not at all (~$10k difference for married filing jointly).
Luckily, there is a solution. Your Roth IRA custodian should have a process to “recharacterize” contributions to a traditional IRA (you might have to open one up).
All it takes is one phone call or filling out one form and the issue should be resolved. Vanguard has this webpage to walk you through how to do it on Vanguard, complete with a phone number to call and the correct form. The Vanguard page also includes important dates and tax implications.
For the Roth IRA income requirement, one misunderstanding I often see is when people think their salary is too much to contribute directly to a Roth IRA. The income requirement is for Modified Adjusted Gross Income (MAGI), not salary.
So what is MAGI? MAGI is a slight adjustment to AGI (Adjusted Gross Income). For most people, MAGI is equal to your AGI on your Form 1040.
Why does this matter?
Let’s say you are 33 years old, single and make $165,000 a year salary. You might think you are ineligible to contribute to a Roth IRA. But what if you also max out your traditional 401(k) at work? This would reduce your taxable income by $23,000 (the max contribution in 2024) to $142,000. If you had no other income, you’d now be eligible to contribute directly to a Roth IRA (less than $146,000 MAGI).
If you are close to becoming ineligible for direct Roth IRA contributions, putting more into a traditional 401(k) or Health Savings Account (or any other above the line deductions) can reduce your taxable income and help you stay eligible.
And if you do end up making more than the Roth IRA income requirement, that opens up the potential for making Backdoor Roth IRA conversions. A future Mound Visits topic!
Lonely Millionaire - Kacey Musgraves
I’m a big Kacey Musgraves fan. Lonely Hour is one of my favorite albums ever. She just released a new album, Deeper Well. I was particularly taken with the song Lonely Millionaire.
I hear time and time again from the young couples I work with how their boomer parents focused on their careers and money at the expense of being there for them. I’ve never met with someone who didn’t express a sense of regret for parents who focused on career/money over family. Even if they are now wealthy.
Here’s the Lonely Millionaire opening verse:
You can step off a plane into a black car
You can pay 'em to wait
You can wear the gold watch on your wrist
But it won't give you back the moments you miss
This song captures the regret I hear so often. Who wants to be a lonely millionaire?
If you want your personal finance questions answered in a future Mound Visits, send me an email at nick@nineinningfinance.com with your question/scenario.
Nothing in this email is intended to serve as financial advice. I don’t know your personal circumstances and would never provide financial advice through this medium. This newsletter is intended to be educational and entertaining. Please consult a financial professional and do your own research before making any changes to your portfolio.