Reply To: 2021 IRA

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Alan S.

If she makes a 2021 Roth contribution and later finds that all or part of the contribution is excess, she has multiple options:
1) Remove the excess with earnings by the due date, but earnings will be taxable and subject to penalty if under 59.5 on her 2021 return.
2) Recharacterize the Roth excess as TIRA contributions, which in her case will be non deductible. If she has no other non Roth IRA balance, she could simply use the back door Roth to eliminate the income phaseout problem starting right now. She would make a non deductible TIRA contribution and convert it right away tax free. Form 8606 is filed to report the non deductible contribution and the 2021 conversion. This is a two step process to contribute to Roth, but it avoids excess contributions and complex income phaseout calculations every year. Since the conversions would be non taxable, that eliminates the 5 year conversion holding requirement. If she does have pre tax IRAs including SIMPLE, SEP, or rollover IRAs from prior employment, her conversion would be mostly taxable unless she were to roll these other TIRAs into the present 403b. But be aware of the expenses and investments in the 403b because there are many bad 403b plans, and moving low expense TIRA money into these plans is not a good idea.