Question

I guess you could say I have a good problem to have. I currently have a Roth IRA and a Traditional IRA in Betterment. I am recently married as of June of this year. My new wife recently got a new job where she is making significantly more than before. We're in a position where both our combined incomes put us over the limit of being eligible to contribute to an IRA (traditional or roth) as far I know from research I've done. I looked into contributing without being eligible and found you could pay a 10% penalty on cash that is contributed. Thankspically, for tax purposes from LMM episodes, people try to go from 401k -> IRA, but it this case would it make sense to go from IRA to 401K or just leave it? There is only about $7600 between the two accounts. For reference, I am 28.  

Answer 1

I wouldn’t pay the penalty fee. Do you have an HSA? If you do then I’d look into maximizing it. If you don’t then I’d evaluate the situation there.  

Comments

@swipple1 I do have an HSA, but will be getting rid of it soon because my wife’s health insurance is better. I’m looking more on what to do with the 7600 at this point.  

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@koball leave the 7600 in their IRA accounts if you contributed that money in previous years. They can continue to grow even though you can’t make new contributions at this time.  

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@koball keep the HSA account. That account is yours to keep and use whether you have an existing plan with it or not. And if you never use it for medical purposes, it acts as a tax-deferred retirement account.  

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@swipple1 I can keep the HSA even if I don’t have a medical plan? I thought you needed to have a plan for the HSA? The balance is sitting at 0 now because of some medical expenses this year.  

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@koball sorry just seeing your question on this and maybe you already got this information, but wanted to share it just in case:  In the future if you become qualified under an eligible plan and can resume contributing to it, pay for medical expenses out of pocket if possible and keep the money in the HSA to let it continue to grow (just keep record of all medical expenses you paid for out of pocket so the withdrawals from the account later in life are tax free).  
https://hsastore.com/learn/taxes/hs...rance

Answer 2

-there is no limit for traditional IRA. Contribute to that and then backdoor when it is tax efficient. -the penalty is not a one time fee, it’s every year. DO NOT DO IT

Comments

@booted there are income limits to contribute to a traditional IRA to deduct it on your taxes. I don’t see any benefit to contributing to it if you don’t get the deduction.  

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The benefit is you are saving for retirement.  

Answer 3

I am pretty sure you only pay the 10% penalty if you withdraw the funds before age 65.  

Answer 4

For the Roth, you will owe a 6% ANNUAL penalty for each year you are over the income limit. Plus you will owe regular taxes on any earnings that contribution made. So don't do it. You don't have to do anything with any amounts already in the accounts when you were under the income limit, so you can just leave them there. If you want to dip a backdoor Roth someday, my advice is to either convert your traditional to a Roth first or do a reverse rollover to a 401k, because the pro-rata rule is a pain in the butt if you don't.  

Answer 5

The advice on here is getting a bit confusing: 1) There r income limits for both Roth and Traditional. Traditional limits are actually much lower than Roth. See IRS website. 2) You can contribute to a "non-deductible" traditional IRA even if over the income limits. People will usually do this and perform a Roth Conversion. Seek professional advice and DON'T put that new money into your existing traditional. 3) You don't need to move money you put in IRAs from previous years. 4) Your easiest option is just to up your 401k contributions until you hit your annual max. These have no income limits.  

Comments

@toniatonic there is one caveat to Roth conversions and that is if there is any traditional IRA money left over than there is a pro rata rule. Best thing is to convert tIRA money to 401k and the contribute to the back door Roth (traditional IRA first, then convert next day to Roth, $6k limit).  

Answer 6

Leave the IRA’s open. They will still continue to grow. Life situations change. Jobs change. Leaving them in place gives you flexibility to roll a 401k into it if you change jobs or toss money in if you get to a spot where you are below the threshold. I would suggest that you take the money that you would have been investing in your IRA in the future and apply it to your 401k. I would push to cap that bad boy out. If you’ve already done that then I would look at investing in a REIT or a non-tax advantaged account.  

Answer 7

If you have tax protected money I would leave it that way. it also is protected from collectors I believe. You never know, you might be glad for it.  

Answer 8

Thanks everyone! This helps. I decided to just leave it where it is and let it grow!