Need your advice on if I or we (wife and I) or just wife can open a Roth IRA. I currently have 401k and a brokerage account with TDA so hoping to get something that will be non-taxable in the future.
married filing jointly for long time
for years our combined income was above the limits to utilize Roth (a VERY good problem to have)
however mid way thru 2018 wife lost her job. Since then she's been working and going to school part time. The job paid her a small amount in 2019 (sub $20k) and even smaller this year due to COVID. So for 2019 and this year combined we will be below the $196k threshold
NOW a caveat, we are about to reach a settlement that will certainly put us over the threshhold and there's a really good chance we have that money next week.

I always figured to open a Roth you would have to show your prior year tax return to prove eligibility but talking with TDA they said no, we just have to provide info based on what we've earned YTD.

So my question is, can I, wife, or both of us open Roth(s) this year?

You can always do a back door Roth

When you open the Roth they don't check your income, but they report how much you contribe to the IRS. So there is no sneaking in before you reach the income limit. You will be hit with penalties from the IRS if you do this.

As the poster said above, if you are over the income limit for a roth and do NOT already have a traditional ira or rollover ira, you can make (a post tax) contribution to a traditional IRA and immediately Roth convert it and pay no taxes on the conversion since the money never received a tax deduction. This is what is known as a "backdoor" roth. If you have any pre tax money in a rollover ira or traditional ira this backdoor process can get messy but if you only have what you stated in your OP you should be okay.

hypeiv said:

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When you open the Roth they don't check your income, but they report how much you contribe to the IRS. So there is no sneaking in before you reach the income limit. You will be hit with penalties from the IRS if you do this.

As the poster said above, if you are over the income limit for a roth and do NOT already have a traditional ira or rollover ira, you can make (a post tax) contribution to a traditional IRA and immediately Roth convert it and pay no taxes on the conversion since the money never received a tax deduction. This is what is known as a "backdoor" roth. If you have any pre tax money in a rollover ira or traditional ira this backdoor process can get messy but if you only have what you stated in your OP you should be okay.

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I don't have ANY IRA accounts open. So if I follow what you guys are saying...
1) if I open a Roth IRA and contribute the max $6,000 at EOY (or some time point) brokerage firm reports I contributed $6k to IRS who then says hold on you can't do that and then they hit me with taxes when I do my annual filing
2) I could do a backdoor plan. Open a Traditional, contribute $6,000 but do not invest it. Then open a Roth and fund the Roth by transferring the $6k from Traditional. Hopefully this would be as easy as it is to deposit money into my regular brokerage acct

You will open a roth and a traditional ira with a broker. Put $6k into the traditional ira but don't take the deductions (either voluntary or because you are over the income limits) ask the broker to roth convert it and roll it into the other account. This is a common strategy so most investment houses will know what to do.

If you think there is any chance you are going to be over the Roth income limit do NOT contribute directly to the Roth.

Keep in mind there is no contribution limit to the back door Roth.

Nm

hypeiv said:

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You will open a roth and a traditional ira with a broker. Put $6k into the traditional ira but don't take the deductions (either voluntary or because you are over the income limits) ask the broker to roth convert it and roll it into the other account. This is a common strategy so most investment houses will know what to do.

If you think there is any chance you are going to be over the Roth income limit do NOT contribute directly to the Roth.

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just to be clear, when I do the traditional IRA and fund it, the brokerage firm will send that info to the IRS. However, so long as I do NOT make/take any related deductions on my filing then I am good. Correct?
That way the IRS viewpoint would be I put money into Traditional but no deductions taken so I'd be leaving money on the table if you will.

Now, could I do this for both my wife and myself? Two traditional accounts and two roth accounts?

Yes on both accounts... If you never took a deduction on the money in the traditional IRA, when you Roth convert it you will not owe any tax on the conversion.

You can set up one for your wife as well. You have until April 2021 to fund for 2020. I am sure if you call up TDA and tell them you need to set up a backdoor roth they will know what you are talking about and will take care of it for you.

Settlement on a personal injury related claim?

If so, talk to your lawyer about this. Classification of the damages can have big tax consequences of not thought through.

emac0002 said:

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Keep in mind there is no contribution limit to the back door Roth.

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Yes, there is.

trip98 said:

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hypeiv said:

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You will open a roth and a traditional ira with a broker. Put $6k into the traditional ira but don't take the deductions (either voluntary or because you are over the income limits) ask the broker to roth convert it and roll it into the other account. This is a common strategy so most investment houses will know what to do.

If you think there is any chance you are going to be over the Roth income limit do NOT contribute directly to the Roth.

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just to be clear, when I do the traditional IRA and fund it, the brokerage firm will send that info to the IRS. However, so long as I do NOT make/take any related deductions on my filing then I am good. Correct?
That way the IRS viewpoint would be I put money into Traditional but no deductions taken so I'd be leaving money on the table if you will.

Now, could I do this for both my wife and myself? Two traditional accounts and two roth accounts?

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Here is what I do every year for back door Roth:

Setup: Open a Traditional IRA for both you and your wife if you haven't already done so. Also, open a Roth IRA for both you and your wife if you haven't already done so.

1. Fund $6K max in both Traditional IRA accounts.
2. Takes 2-3 days for cash to transfer and show up in Traditional IRA.
3. Immediately transfer each $6K cash to your respective Roth IRAs once the cash is available in your Traditional IRAs. Should be a click of a button if using Fidelity, Vanguard, or like competitor.
4. Takes 1-3 days for cash to move from Traditional to Roth.
5. When it clears into Roth, then invest it.
6. Repeat every year up to annual max.

Actually there isn't a limit. There is a limit to the amount you can contribute to a traditional IRA and then convert in a given year.

I digress.

I thought that was common sense

When you do a backdoor contribution, there is a certain way you have to report it when file your taxes. I use TurboTax and have to Google "backdoor Roth TurboTax" to walk me through it every year.

It's not intuitive. If you do what seems to make sense in TurboTax, it will try to count your contribution as taxable income.

If you use a CPA, I'm sure they know how to report it correctly.

Also, if you use a firm like Fidelity, you can do all of your contributions/withdrawals/deposits online. It just takes a few days before you can move the money from the IRA to the Roth.

hypeiv said:

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When you open the Roth they don't check your income, but they report how much you contribe to the IRS. So there is no sneaking in before you reach the income limit. You will be hit with penalties from the IRS if you do this.

As the poster said above, if you are over the income limit for a roth and do NOT already have a traditional ira or rollover ira, you can make (a post tax) contribution to a traditional IRA and immediately Roth convert it and pay no taxes on the conversion since the money never received a tax deduction. This is what is known as a "backdoor" roth. If you have any pre tax money in a rollover ira or traditional ira this backdoor process can get messy but if you only have what you stated in your OP you should be okay.

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Why would it matter if you have pre-tax money in a rollover IRA? (Assuming you aren't converting that money)

When you do the Roth conversation you don't get to pick what dollars are converted. The IRS considers all your IRAs as one account and the amount of the conversion that is taxable is based on the pro-rata rule. If you contribute $6k post tax to an ira but already have $54k in a rollover ira. If you try to do a roth conversion the IRS will say only 10% of the conversion is post tax and you will have to pay tax on 90% of the conversion.

Thanks everyone for the replies. Very helpful and ull get set up soon
Stat repairman, not injury claim. Employment related

Tons of bad info on this thread