Make punctual contributions to IRS based on earnings
I will answer this question broadly for various jurisdictions, and also specifically for the US, given the OP's tax home: Generally, for any tax jurisdiction If your tax system relies on periodic prepayments through the year, and a final top-up/refund at the end of the year (ie: basically every country), you have 3 theoretical goals with how much you pre-pay: Specifically, for the U.S. All information gathered from here: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes. In short, depending on your circumstance, you may need to pay quarterly estimated tax payments to avoid penalties on April 15th. Even if you won't be penalized, you, may benefit from doing so anyway (to force yourself to save the money necessary by April 15th).  I have translated the general goals above, into US-specific advice:
"Like JoeTaxpayer said, I don't know of any difference between the backdoor and a regular Roth IRA contribution besides the issue with existing pre-tax IRA money. So if it is your practice to contribute at the beginning of the year (good for you, most people wait until the last minute), then doing a backdoor seems like the safe choice. Some people have speculated that, hypothetically, the IRS could use the ""step transaction doctrine"" to treat it as a single direct contribution to a Roth IRA (which then would be disallowed and cause you a penalty until you take it out), but I have never heard of this happening to anyone. As for the paperwork, you just need to fill out one extra form at tax time, Form 8606 (you need to complete two parts of it, one for the non-deductible contribution, and one for the conversion). It is pretty straightforward. (Although I've found that it is a pain to do it in tax software.) Another option would be for you to contribute to a Roth IRA now, but when you discover that you're over the limit at the end of the year, re-characterize it as a Traditional contribution and then convert it back to Roth. But this way is not good because then there is a long time between the Traditional contribution and the Roth conversion, and earnings during this time will be taxed at conversion." "(Insert usual disclaimer that I'm just a random guy on the Internet, not any kind of certified tax professional.) But once I withdraw the money, how is that money taxable? If I'm understanding your situation correctly, you want to look at the instructions for form 8889, under Excess Employer Contributions. It simply says, ""If the excess was not included in income on Form W-2, you must report it as 'Other income' on your tax return."" There doesn't look to be any particular wording beyond that, so I'd just put it on Form 1040 Line 21 Other Income, and label the line really specifically like ""Excess Employer Contributions distributed from HSA"". Also there is no mention of whether any FICA taxes (social security and Medicare) apply to these amounts. You say that this was entirely contributed by the employer. But even for cases where one contributes directly through payroll with an optional pre-tax deduction, this is usually implemented as a ""salary reduction agreement"" where the company is actually paying less money in salary (and thus less showing up on the W-2) and just contributing to the HSA account instead. It's listed on the 8889 as an ""Employer Contribution"", even if in fact one sees it as a deduction on one's pay stub. In either case, since the company didn't pay you the money as salary (and merely contributed to the HSA instead), I wouldn't expect any FICA taxes to be owed on it. The fact that the IRS wants it listed under ""Other income"" instead of ""Wages"" also implies to me that it doesn't count as salary that needs FICA taxes. Presumably, if people abused this in some way (like getting their employer to deliberately over-contribute each year and getting a refund in some sort of crazy scheme to try to reduce their SS taxes) the government would get rather upset and probably call it some sort of tax evasion. But for the amounts involved here, particularly as you're following the instructions listed, I just wouldn't worry about it. Assuming that I withdraw excess contribution and report everything on Form 8889 and Form 1040, is there any further action required from my previous employer? It's your HSA, so I wouldn't think so. Since the eligibility for HSAs is based on what you do, and not what they do (you could, for instance, get covered by a different HDHP and they wouldn't be notified nor really care), I don't think they have anything more to do with it. Also I am not sure how to calculate amount of interest attributable to excess contribution. I have only around $0.20 of total interest this year. The bank holding the HSA could probably help with that, as I'd expect it to be a normal part of the excess contribution withdrawal process. If not, I'd just make a reasonable effort based on the interest rate, amount involved, and number of days that the excess was in the account. Also keep in mind that in general when filing taxes, anything under $0.49 can round to $0. At some point, one can only be ""as honest as the law allows""." "So you are paying taxes on your contributions regardless, the timing   is just different. I am failing to see why would a person get an IRA, instead of just   putting the same amount of money into a mutual fund (like Vanguard) or   something like that. What am I missing? You are failing to consider the time value of money. Getting $1 now is more valuable to you than a promise to get $1 in a year, even though the nominal amount is the same. With a certain amount of principal now, you can invest it and it will (likely) grow into a bigger amount of money (principal + earnings) at a later time, and we can consider the two to have approximately equivalent value (the principal now has the same value as the principal + earnings later). With pre-tax money in Traditional IRA, the principal + earnings are taxed once at the time of withdrawal. Assuming the same flat rate of tax at contribution and withdrawal, this is equivalent to Roth IRA, where the principal is taxed at the time of contribution, because the principal now has the same value as the principal + earnings later, so the same rate of tax on the two have the same value of tax, even though when you look at nominal amounts, it might seem you are paying a lot less tax with Roth IRA (since the earnings are never ""taxed""). With actual numbers, if we take a $1000 pre-tax contribution to Traditional IRA, it grows at 5% for 10 years, and a 25% flat rate tax, we are left with $1000 * 1.05^10 * 0.75 = $1221.67. With the same $1000 pre-tax contribution (so after 25% tax it's a $750 after-tax contribution) to a Roth IRA, growing at the same 5% for 10 years, and no tax at withdrawal, we are left with $1000 * 0.75 * 1.05^10 = $1221.67. You can see they are equivalent even though the nominal amount of tax is different (the lower amount of tax paid now is equivalent to the bigger amount of tax later). With a taxable investment which you will not buy and sell until you take it out, you contribute with after-tax money, and when you take it out, the ""earnings"" portion is subject to capital-gains tax. But remember that the principal + earnings later is equivalent to the principal now, which is already all taxed once, and if we tax the ""earnings"" portion later, that is effectively taxing a portion of the money again. Another way to look at it is the contribution is just like the Roth IRA, but the withdrawal is worse because you have to pay capital-gains tax instead of no tax. You can take the same numbers as for the Roth IRA, $1000 * 0.75 * 1.05^10 = $1221.67, but where the $1221.67 - $750 = $471.67 is ""earnings"" and is taxed again at, say, a 15% capital-gains rate, so you lose another $70.75 in tax and are left with $1150.92. You would need a capital-gains tax rate of 0% to match the advantage of the pre-tax Traditional IRA or Roth IRA. After-tax money in Traditional IRA has a similar problem -- the contribution is after tax, but after it grows into principal + earnings, the ""earnings"" part is taxed again, except it is worse than the capital-gains case because it is taxed as regular income. Like above, you can take the same numbers as for the Roth IRA, $1000 * 0.75 * 1.05^10 = $1221.67, but where the $471.67 ""earnings"" is taxed again at 25%, so you lose another $117.92 in tax and are left with $1103.75. So although the nominal amount of tax paid is the same as for pre-tax money in Traditional IRA, it ends up being a lot worse. (Everything I said above about pre-tax money in Traditional IRA, after-tax money in Traditional IRA, and Roth IRA, also applies to pre-tax money in Traditional 401(k), after-tax money in Traditional 401(k), and Roth 401(k), respectively.) Regarding the question you raise in the title of your question, why someone would get contribute to a Traditional IRA if they already have a 401(k), the answer is, mostly, they wouldn't. First, note that if you merely have a 401(k) account but neither you nor your employer contributes to it during the year, then that doesn't prevent you from deducting Traditional IRA contributions for that year, so basically you can contribute to one or the other; so if you only want to contribute below the IRA contribution limit, and don't need the bigger 401(k) contribution limit, and the IRA's investment options are more attractive to you than your 401(k)'s, then it might make sense for you to contribute to only Traditional IRA. If you or your employer is already contributing to your 401(k) during the year, then you cannot deduct your Traditional IRA contributions unless your income is very low, and if your income is really that low, you are in such a low tax bracket that Roth IRA may be more advantageous for you. If you make a Traditional IRA contribution but cannot deduct it, it is a non-deductible Traditional IRA contribution, i.e. it becomes after-tax money in a Traditional IRA, which as I showed in the section above has much worse tax situation in the long run because its earnings are pre-tax and thus taxed again. However, there is one good use for non-deductible Traditional IRA contributions, and that is as one step in a ""backdoor Roth IRA contribution"". Basically, there is an income limit for being able to make Roth IRA contributions, but there is no income limit for being able to make Traditional IRA contributions or for being able to convert money from Traditional IRA to Roth IRA. So what you can do is make a (non-deductible) Traditional IRA contribution, and then immediately convert it to Roth IRA, and if you did not previously have any pre-tax money in Traditional IRAs, this achieves the same as a regular Roth IRA contribution, with the same tax treatment, but you can do it at any income level." IRA is an account. You can open as many as you want. What's limited is the contributions: you cannot deposit to the IRA (all of them combined) more than what you've earned during the year, or $5500 (for 2013), the lowest. There are also limits on how much you can deduct, depending on your income and availability of other retirement programs at your work. You can open as many IRAs as you want in your child's name, but if your child had only earned $500 this year - that's how much you can put in these accounts. Your wife and you share the earned income limit, so if your wife is not working, you can still contribute to the IRA in her name, based on your own earnings (i.e.: if you earned more than $11000 - you can contribute the maximum $5500 for each of you). The limits are for all the IRA combined, doesn't matter how many accounts you have, and how many of them are Roth. "I spent some time searching, and couldn't find the answer written explicitly in IRS regulations.   What I did find was this chart from the irs showing that nonqualified distributions from a Roth 401k are pro-rated between contributions and earnings.  It is well documented that you can't withdraw any money early or tax free (even contributions) from a Roth 401k (""Designated Roth Account"" in IRS parlance) that has made any money. source You can do a direct rollover from a ""Designated Roth Account"" to a Roth IRA and the basis  describing contributions vs. earnings is preserved. source And there is plenty of evidence showing you can withdraw contributions from a Roth IRA without penalty. source All that being said, I can't find anything from the IRS that says this is a legitimate strategy." The safe harbor provision is based on the tax you or the prior year. So in 2016 this helped you as your tax was substantially increased from 2015. However, by the same token in 2017 your safe harbor amount is going to be very high. Therefore if 2017 is similar you will owe penalties. The solution here is to make estimated tax payments in the quarters that you realize large gains. This is exactly what the estimated tax payments are for. Your estimate tax payments do not have to be the same. In fact if you have a sudden boost in earnings in quarter 3, then the IRS expects that quarter 3 estimated tax payment to be boosted. "I'm not a tax lawyer, but from what I can tell it looks like you'd be eligible to use your contractor income to fund a Solo 401(k).  http://www.irafinancialgroup.com/whatissolo401k.php ""To access these benefits an investor must meet two eligibility requirements: The presence of self employment activity. The absence of full-time employees."" And from the IRS itself (http://www.irs.gov/pub/irs-tege/forum08_401k.pdf)" From the instructions: If you do not need to make any adjustments to the basis or type of   gain or loss (short-term or long-term) reported to you on Form 1099-B   (or substitute statement) or to your gain or loss for any transactions   for which basis has been reported to the IRS (normally reported on   Form 8949 with box A checked), you do not have to include those   transactions on Form 8949. Instead, you can report summary information   for those transactions directly on Schedule D. For more information,   see Exception 1, later. However, in case of ESPP and RSU, it is likely that you actually do need to make adjustments. Since 2014, brokers are no longer required to track basis for these, so you better check that the calculations are correct. If the numbers are right and you just summarized instead of reporting each on a separate line, its probably not an issue. As long as the gains reported are correct, no-one will waste their time on you. If you missed several thousand dollars because of incorrect calculations, some might think you were intentionally trying to hide something by aggregating and may come after you.