Excess Contribution to Roth IRA
Client contributed $5,500 to his Roth in 2018. He is doing taxes now and realizes MAGI was too high in 2018 and wants to recharacterize the $5,500 as a non-deductible Traditional IRA for 2018 and then convert it to his Roth as a “back-door Roth”. He has no other money in Traditional IRA’s.
To remove the $5,500 from his Roth IRA, I am unclear if he should use his custodian’s Recharacterization Request Form or remove it as a return of excess contribution using an IRA Distribution Request Form and then make the Traditional IRA contribution separately. Is there a difference?
Can someone please explain the proper way to do this and what tax forms must be completed to accomplish it.
Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2019-04-12 16:17
Normally, the excess would be recharacterized, and if there are small gains on the contribution, the gains would be taxable when converted. The other option of requesting return of the contribution is usually only done when there is a loss on the contribution. If there is a loss, then there are no earnings to be taxed and a new contribution can be made for the full contribution limit. Since time is critical here, client must either file the return OR an extension by Monday, 4/15 in order to extend the deadline for either of these two options to 10/15. May be easier to file an extension at this point. Note that a new TIRA contribution for 2018 (if withdrawal of the Roth is to be done) can be done today or by 4/15. The old contribution does not have to be dealt with before a new one is made. Therefore, first thing to do is file extension (or return) to buy more time to avoid the excise tax, decide which option will be used, and if removal due to loss is selected, make the new 2018 contribution by Monday.
Permalink Submitted by Logan Dietel on Tue, 2019-04-16 16:59
If the excess was recharacterized, and there are small gains on the contribution, are the gains taxable if the owner does NOT complete the conversion to ROTH IRA? Rather, leaves the funds in the Traditional IRA as non-deductible?
Permalink Submitted by Alan - IRA critic on Tue, 2019-04-16 18:12
There is no current taxes on the gains transferred to the TIRA since a recharacterization is a non taxable transfer. The gains would eventually be taxed, but not until distributions or RMDs are distributed from the TIRA in the future. In other words, these gains are treated as if they were earned on a TIRA contribution and just stayed in the TIRA.