Know the rules so you don’t get hit with an excess contribution penalty
So you’re getting married in 2022? Congratulations. And when you add up all your income (yours and your spouse’s), you’ll earn more than the limit to contribute to a Roth IRA. But since you’re below the income limit now, you want to contribute to a Roth before the wedding. Sounds like a good idea.
But guess what? You can’t.
The Rules are the Rules
If you're married as of December 31st, you're considered to be married for the full year for tax purposes – no matter what the wedding date. That means you'll file your taxes as married – either jointly or separately – for 2022.
You'll also be subject to the joint income limits for Roth contributions for the full year. If you're married filing jointly and your combined adjusted gross income is less than $204,000, then you both can contribute the full $6,000 to a Roth for the year (or $7,000 if you're age 50 or older).
Once your joint income reaches $204,000 to $214,000, then you both can make reduced contributions. You can't contribute to a Roth at all if your joint income is more than $214,000. See IRS Publication 590-A, Individual Retirement Arrangements, for a worksheet to calculate your modified adjusted gross income for the Roth limits.
And you can't get around the Roth limits by filing taxes separately. The income limit is just $10,000 for married people filing separately if you lived with your spouse at any time during the year.
If you earn too much to contribute to a Roth, you can both put money instead in nondeductible traditional IRAs for 2022 and then convert them to Roths. But you could be taxed on a portion of the rollover if you have any other money in traditional IRAs (the tax-free portion of the conversion is based on the ratio of your nondeductible contributions to the total balance in all of your traditional IRAs).
Be Careful of Excess Contribution Penalties
If you had already contributed to the Roth for the year and now your income disqualifies you, you would still have time to undo the contribution. Otherwise, you would have to pay a 6% penalty on excess contributions.
You could take the contributions (and any earnings on them) out of the Roth before the tax-filing deadline, or you could have your IRA administrator switch your 2022 Roth contributions (plus all earnings on that money) into a traditional IRA. If you made contributions to the Roth in earlier years, the administrator should calculate how much of the earnings in the account should be attributed to the 2022 contribution. You can keep the money from previous years' contributions in the account.
Be sure to consult your financial professional to help you determine whether your contributions qualify or not.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This article was prepared by FMeX.
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