I contributed to a Roth IRA, but make too much money. What do I do now?

The IRS specifies that you can only contribute to a Roth IRA if you make under a certain income limit. For 2022 you can make a full contribution if you are:

  • Single and make under $129,000 or married and make under $204,000.

You can make a partial contribution if you are:

  • Single and make under $144,000 or married and make under $214,000.

What if you made a contribution already earlier in the year and then made more than you expected and now you’re outside of the IRS income limits? Unfortunately, if this is the case, then you will have to take the money, as well as any earnings on it, back out or recharacterize it as a traditional IRA contribution or a Roth contribution for a future year. Here are the three options you have in more detail.

  1. Take the money out. You will have to take the money out and any earnings you made on that money. You can put this money into a brokerage account or another investment, but it can’t go into your Roth.
  2. You can move the money over to a traditional IRA, but there are a couple issues with this. The income limits are even lower for a traditional IRA than a Roth IRA for tax deductible contributions. In other words, you can move the money over to a traditional IRA, but you will not be able to take a tax deduction on the contribution, and you will still owe income taxes on it when you take the money out. This is double taxation and should be avoided if possible, however the tax deferral is still better than a brokerage account.
  3. You can reclassify the contributions for a different year. If you see your income going down in later years or you’ll be getting married next year and therefore your income limit will be higher, you can reclassify the contribution for a different year. However, the IRS will charge you a 6% penalty each year until the problem is fixed. For instance, if you made a $6,000 contribution in 2020 and made above the phaseout limit, then got married in 2021 and stayed within the income limits, you could reclassify the contribution as a 2021 contribution, but on your 2020 tax return the IRS would penalize you 6%, or $360.

Making above the income limits is a good problem to have, but still a problem. With some careful planning you can come up with the optimal tax and investing strategy. If you’re still under the limit, enjoy your time and contribute away to the best investing vehicle out there.*

*Tax laws change constantly. Before making any decision, consult with a tax professional. This article is for educational purposes only.

As a financial advisor Daniel is passionate about helping people achieve their dreams and greatest potential in life. He enjoys strong coffee, thick books, and long bike rides in his hometown of Roanoke, VA.