I have a Vangaurd Roth IRA. I just opened it in Feburary of 25. This is all very new to me.
I maxed out 24, then maxed out 25. I understood the annual income limit was around 160K. Last month, I received a large equity payout from the business I work for that took me way past the annual income limit.
I asked my Edward's Jones guy what to do and he said something about a backdoor Roth and to talk to my tax man. I talked to my tax man, who wasnt much help either, he just confirmed it was over the limit to contribute in 2025…
Can someone explain it to me like I am 5 years old… this is all new to me and I would like to, if possible, max out my 2026 contribution​ at the first of the year.
2025 Roth IRA contributed and wasnt eligible
byu/No-Possession-162 inpersonalfinance
Posted by No-Possession-162
6 Comments
What are you paying Edward Jones for if your guy can’t explain a backdoor Roth? Pull your money from him, handle it yourself, and Google how to do a backdoor roth in the next few days
Do you have a traditional or rollover IRA currently?
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Give it an eyeball.
Do you already have a Roth? If so, what year was it opened?What is your filing status (married filing jointly, etc.) What is the income for 2025?
If your income for single is over $165k, joint over $246k, you can’t divert the money you put in over to a Roth. You also can’t do a backdoor Roth with it since it wasn’t an allowed contribution. And if you did it through payroll to reduce your taxable income, you’ll need to undo it through payroll, because your tax withholding are going to be incorrect and need to be redone.
If you contributed outside of payroll you will do the withdrawal yourself, through your brokerage.
In either case, any earnings on the invested amount will incur taxes. You will have until April 15 to correct this.
[I am not a CPA or an accountant, but I do all of the accounting for my 4 businesses I own, and all my own personal taxes, and all of our investing and tax planning. I keep up on tax laws. And I get my tax returns and accounting reviewed periodically by professionals so I am confident I know what I am doing.]
Contact Vanguard to initiate a recharacterization, which is a direct transfer of the contribution plus any earnings (or minus losses) to a traditional IRA.
If you do this by the tax filing deadline there is no penalty. The penalty is 6% per year for every year you leave the funds in a Roth.
Once you recharacterize, you can then execute a backdoor Roth conversion.
This might be helpful: https://investor.vanguard.com/investor-resources-education/iras/ira-recharacterization
First off all, run DO NOT walk to leave Edward Jones.
What you want to look up is roth excess contribution and do it now on the vanguard site. Open a Traditional IRA and then start the form to reclassify your ROTH contributions as Traditional and move them into your newly created Traditonal IRA.
I just did this and it was less than 30 min of work.