Question Regarding Roth IRA Over Contribution & MAGI

[Matt McElhone]

Hello All! I'm seeking some information about this subject. Last year I opened a Roth IRA with Fidelity and contributed the $7,000 max, forgetting I also have a Roth with Acorns which $1,400 was contributed to through weekly direct deposit.

I had been researching my options for this scenario, but now that I have my 2024 taxes squared away I've realized that my MAGI exceeds the limit for single filers. (I'm a Realtor and ended up making 2x what I usually do last year.)

Now I'm pretty confused on what my options are. Any advice on the best route to take would be greatly appreciated. Thanks in advance! 

[Max Gallagher]

Matt - First, it is vital to remove the excess contributions from both your Fidelity and Acorns Roth IRA accounts. Google "Fidelity return of excess IRA contributions" and you'll find the workflow to take you through the process. Acorns likely has a similar process or form.

Once contributions are backed out, you might consider an alternative way to fund your Roth IRA for 2024.. by making a backdoor Roth contribution prior to 4/15. To do this, you'll make a non-deductible contribution to a Traditional IRA and immediately convert that contribution to your Roth IRA. Since you made the Traditional IRA contribution with after-tax dollars (ie non-deductible), there are no tax implications of converting that contribution to Roth.

To supercharge your retirement savings moving forward, especially in higher income years, I'd recommend looking into a Solo/Individual 401(k). This account can be a great tool to defer and grow income.. ultimately helping to lower taxes paid in the current year and over a lifetime. This also doesn't prevent you from continuing to fund your Roth IRA via backdoor Roth contributions.

ITS VERY IMPORTANT TO NOTE that the backdoor Roth strategy only makes sense if you have zero balance in Traditional/Pre-Tax IRAs (including SEP/SIMPLE). Otherwise you will be subject to the Pro-Rata Rule and there will be tax consequences on the conversion. To get around this, you could look into rolling over your Pre-Tax IRA balance into the Solo 401(k) mentioned above which is not subject to the pro-rata rule. The Pro-Rata Rule applies to Pre-Tax IRA balances as of 12/31 of the tax year in question so if you have/had any balances in a Pre-Tax IRA, a backdoor Roth conversion for 2024 will likely result in taxable income. 

Make sure you get professional guidance on the corresponding reporting and let me know if you'd like to talk any more details. Hope that helps!