All Forum Posts by: Matt McElhone

@Matt McElhone Since your MAGI exceeds the Roth IRA limit, your entire $8,400 contribution ($7,000 to Fidelity + $1,400 to Acorns) is now considered an excess contribution, and you'll need to take action to avoid penalties.
Options to Fix This:

1. Recharacterization – You can convert the legal maximum into a Traditional IRA (before the tax deadline) to avoid penalties. This is the best option if you still want to keep the funds tax-advantaged if you are under the income limit for a traditional IRA. The alternative is the convert the legal maximum into a non-deductible traditional IRA. You will need to withdraw the excess above the legal maximum (plus earnings) in both scenarios.
2. Withdraw the Excess – You can withdraw the extra $8,400 plus any earnings before the tax deadline to avoid the 6% excess contribution penalty. However, any earnings withdrawn may be subject to income tax and a 10% early withdrawal penalty if you're under 59½.
3. Pay the 6% Penalty & Fix It Later – If you don’t withdraw or recharacterize, you’ll owe a 6% penalty on the excess contribution every year until it’s removed. You could reduce future contributions to absorb the excess over time.

Since you exceeded the Roth IRA income limit entirely, recharacterization up to the limit or withdrawal is your best bet. A tax professional can confirm the best move based on your full financial picture.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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!

Sounds like you may become a backdoor man

Have you filed yet? Can’t you back some of that out? Check with CPA @Ashish Acharya or @Michael Plaks