Tax Time - The Roth IRA

March 09, 2022

An unwelcome surprise, an IRS letter in the mail with an uncomfortable penalty is not something most investors anticipate.  But it happens, and more often than you think.  Sometimes it’s for failing to report capital gains appropriately but other times it’s tied to contributions you make to an individual retirement account (IRA).

In the letter, it turns out that you’ve just been notified that your earnings were too high to contribute to a very popular retirement savings tool, the Roth IRA.  This notice is tied to a tax return which has probably long since been forgotten and filed away, but you now owe a penalty and need to fix the mistake.  But why did this happen?  

First, if you’re not familiar with the potential benefits of Roth-based accounts, you owe it to yourself to do a little digging online.  Our legislators have set limits on WHO can use certain types of IRAs, so they’ve phased them out for higher income earners.  There's good news … there may be a workaround or an alternative course you can take, by using “the backdoor Roth” or a “non-deductible Traditional IRA” for long-term tax deferred growth; these planning techniques are worthy of exploration and you have up until 6 months post tax-filing deadline to correct any prior year’s over-contribution.  For example, and pending legislative changes out of our control, you should have until October 15th, 2022 to rectify any contributions for 2021.

Bottom line, please be mindful of your growing income and be proactive - - communicate with your tax professional about your continued IRA contribution eligibility… And call your favorite financial advisory team if you need help “fixing” any errors; sometimes the solution is quick, easy and simple; other times the resolution can be more complex, particularly if you’re more than 6 months beyond the tax filing deadline.  

Did you earn too much in 2021?  Start here: