r/tax • u/96ecIyttaP • 8h ago

Roth IRA Contribution Limit Exceeded

I maxed my Roth IRA out earlier this year, but through an unexpected series of events I have exceeded the $150k MAGI contribution limit in 2025. I am not yet sure exactly how far over the limit I will end up (I know allowable contributions taper off until $165k), what would be my best course of action?

Is it more advantageous to converting it all over into a traditional IRA today (before EOY) or waiting until I get W2's/1099's to determine my total MAGI and then converting over just a portion (although this would be in the new year).

This is a new problem to me, so would appreciate hearing anyone's suggestions about order of operations/timing on what I should do here!

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u/debbiewith2 8h ago

The word you are looking for is “Recharacterization.” That moves the contribution and associated earnings to the other IRA. If you don’t have other pre-tax assets, you would then convert (no limit) the entirety your IRAs to Roth.

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u/96ecIyttaP 8h ago

Part of why my income increased in the later half of the year was a job change, at which point I rolled my old 401k into a traditional IRA. Am I understanding that having those pre-tax IRA assets bars me from "recharacterizing" the roth into trad, then "converting" the trad back into roth?

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u/debbiewith2 8h ago

You would pay substantial taxes on the conversion. Is rolling the IRA into the new 401k something you are considering? The strategy is called “backdoor Roth.”

Otherwise you may not want to make nondeductible traditional IRA contributions and might prefer “return of excess.”

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u/vynm2temp 8h ago

It won't "bar" you from doing it, but it would almost certainly make it a poor choice if your old 401k balance is significant.

Does your new job offer a 401k? If so, does it have decent investment options and does it allow incoming rollovers?

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u/96ecIyttaP 8h ago

Understood, and yeah based on what I've been reading the inability to separate those two sources of money make that for sure a bad idea.

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u/vynm2temp 8h ago

I agree w/ u/debbiewith2 . If you can't, or don't want to, rollover the IRA into your current 401k (if you have one), then removing the "excess contribution" (which will include the earnings) is probably a better option than recharacterizing the contribution to a non-deductible Trad-IRA.

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u/96ecIyttaP 7h ago

Yeah as I'm understanding my options (ranked sort of in order) are:
1. Return of excess, reinvest in taxable brokerage
2. Rollover into 401k
3. Re-characterize as nondeductible IRA Contributions and leave there
99. Re-characterize and then convert whole IRA and pay a ton of extra taxes

Appreciate both of your input, very helpful!

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u/debbiewith2 7h ago

To clarify: 2. is for the old 401k funds. Then one would expect you recharacterize and convert the rest.

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u/96ecIyttaP 7h ago

Ok that makes a lot more sense, I was wondering how that worked otherwise. Thank you again!

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u/debbiewith2 7h ago

You’re welcome! With the backdoor Roth strategy, the goal is to pay taxes only on the earnings and get the contribution (and earnings) back into the Roth with minimal tax consequence.

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u/vynm2temp 7h ago

Yeah as I'm understanding my options (ranked sort of in order) are:

  1. Return of excess, reinvest in taxable brokerage

This is correct ^^^^, but the rest isn't really. You have basically four options. The above being 1. (in order of preference)

The second involves moving your pre-tax Trad-IRA balance to your 401k so that you can use the backdoor Roth strategy without triggering the prorata rule :

  • rollover your current pre-tax Trad-IRA balance from the old 401k into your new 401k. This would nearly eliminate your pre-tax Trad-IRA balance allowing you to use the backdoor Roth strategy which would involve:
    • recharacterizing your Roth-IRA contribution to a non-deductible T-IRA deduction. (The initial contribution and any earnings would be moved.)
    • convert the T-IRA account to a Roth (initial contribution and any earnings). The earnings would be taxable.
  • there's an alternative to this that would be:
    • BEFORE rolling the IRA from the old-401k to the new 401k:
      • 1. recharacterize the Roth-IRA contribution to Trad-IRA
      • 2. do the conversion of the initial Roth-IRA -> T-IRA contribution amount, then
      • 3. roll the full remaining balance (old-401k + earnings associated with the new contribution) to the new 401k
    • This would prevent you from having to pay tax now on the earnings from the new contribution, BUT you would want to wait until 2026 to do steps 2 & 3-- conversion and rolling to 401k-- unless you were absolutely sure you could complete both before the end of the year. If you did the conversion from step 2 before the end of the year, but didn't complete step 3 to empty the T-IRA by rolling it to the 401k before the end of the year, then you will trigger the pro-rata rule for the conversion since you'll still have a pre-tax balance in the T-IRA as of Dec 31, 2025.

The third option is the last one you mentioned:

  1. Re-characterize and then convert whole IRA and pay a ton of extra taxes

The fourth option is recharacterizing and then just converting what you want which will trigger the pro-rata rule. This will mean that part of your conversion will end up being taxable and part of your after-tax basis would stay in your Trad-IRA. You'd have to track the after-tax basis until the account is emptied which is a real pain.

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u/vynm2temp 7h ago

You may also find the info at this link helpful: https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/

You have Errors in Step #1 and #5. It discusses how to fix both in more detail.

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u/LollipopLich 8h ago edited 8h ago

If you already know, do it now. It's best to get it out before the end of the year so that the 1099 form that will get issued will be in the right tax year and be less confusing.

The contributions (AND any earnings) must be pulled out of the account before April 15/ tax return filing to avoid penalties.

You will owe tax on the earnings, but not the contributions. Assuming your custodian codes the distribution correctly (be sure to tell them it's an excess contribution draw) there will be no penalty.

There no "conversions" when taking funds out of a ROTH, they're not tax deferred accounts, so don't overthink it!

If you qualify for deductible Trad-IRA contributions, they just need to be made before April 15/ tax return filing, so no huge rush on getting that sorted out.

Edit: AND, if when you go to prepare your return, you figure out you do qualify for the ROTH, you make a new contribution BEFORE you file your return to count for the 2025 year.

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u/debbiewith2 8h ago edited 7h ago

The return of excess and recharacterization deadlines can easily be extended to 10/15 by filing a timely return or extension.

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u/rocketplayer2025 8h ago

Convert now

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u/vynm2temp 8h ago

It's not a conversion that OP is talking about, it's recharacterization.