correcting excess contribution to Roth IRA | Ed Slott and Company, LLC

correcting excess contribution to Roth IRA

Client, age 40 made a $6000 contribution to an existing Roth IRA in 2019. Earnings attributable to the contribution are $1,000. Client divorced during the year and his single status puts him over the income limit to contribute directly to a Roth IRA. Client's financial advisor suggested withdrawing the excess contribution along with the attributable earnings and paying income tax on the earnings, then making a non- deductible contribution to a traditional IRA and doing a back door conversion.

The above sounded reasonable, but could the client do a recharacterization of $7,000 (contribution plus earnings) to a nondeductible traditional IRA and later do a conversion of that account to a Roth IRA? Client does not currently have any traditional IRA assets.

Thank you

Obtaining a return of contribution instead of doing a recharacterization does not make sense.  A return of contribution, traditional IRA contribution and Roth conversion would result in the $1,000 of gain being taxable income and subject to a 10% early-distribution penalty with only $6,000 ending up in the Roth IRA.  A recharacterization followed by a Roth conversion of $7,000 would end up with the same $1,000 being taxable income, no 10% early-distribution penalty and $7,000 in the Roth IRA.


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