Income Limit for Roth IRA

Investing
#1

I am a single filler and I opened a betterment Roth IRA in November 2020 when my income was around 100k.

I have maintained my corporate job and my salary has raised to $110,000 but I also started my own business in December 2020.

My year to date total earnings for self employment and corporate is now over $200,000 therefore my income exceeded the limit months ago for any Roth IRA contributions. I just realized last night and turned off my weekly recurring investments on.

My year to date investments in that account are only $2,395 and I have a total balance of $4023.

What do I do with balance? I need to withdraw, correct? Then I get penalty with IRS when tax filing happens ?

#2

Hey Amanda!

This is actually a pretty common problem. It’s caused because we have to contribute to a Roth IRA before we know if we’re actually eligible! So sometimes you start making contributions, then find out later you’ve made too much during the year and are no longer eligible to contribute.

The remedy is to basically “undo” the contribution. You can probably call Betterment and explain this to them and they can help you out. They may suggest “recharacterizing” the contribution as a non IRA contribution. You also may be able to do a “backdoor Roth IRA” where you contribute to a traditional IRA, then immediately convert it to a Roth IRA.

Either way, when you’re making over $200K, you’re generally in “talk to a CPA” territory. For the $1K or so you pay them, they may be able to save you much more than that on what’s likely to be a $70K tax bill or so, depending on your state!? Or at a minimum, they can make sure you’re doing everything right to save you a mess down the road.