inappropriate ‘contribution’ to my Roth IRA
I made an ineligible contribution to my self-directed Roth IRA (2019) as I am not earning income. My CPA suggested I do a recharacterization of the funds to remove them from the account. The non-fiduciary money manager of my Roth said I cannot do a recharacterization due to a new IRS guideline as of 2017. I noticed in your FAQs that you mention this as an option. I am not sure what I can and cannot do.
I was originally told that I should take money from a traditional IRA that is held with a different fiduciary custodian to put into the Roth. I was told by ETC (where my Roth is) I needed to open a traditional with them and do a conversion from the new traditional into the Roth. I opened a new traditional account with them and rolled money from the first traditional into the new one. Then I took the money from the traditional into the Roth with the intention of recharacterizing the funds back into a traditional. After filing the paperwork, I am now being told I cannot recharacterize the funds due to the IRS change in 2017.
Please advise. Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2020-05-22 22:25
Permalink Submitted by Sue Kardon on Mon, 2020-05-25 16:17
It does seem like to separate issues but one occurred due to the other. I think it got me in deeper. I made the Roth contribution in Nov 2019. I was not earning an income. When my CPA was doing my taxes in March 2020, she informed me of the incorrect contribution. She told me to do a conversion from my TIRA to add money to the Roth so I could ‘pay myself back’. When I tried to make the contribution from my TIRA from another institution, the non-fiduciary company (ETC) holding my Roth, told me I would first have to open a TIRA with them (ETC) before I could move the money into the Roth. I opened a TIRA with ETC in May 2020, moved money into that new TIRA account, then converted it to the Roth. I was then instructed by ETC that in order to get the money out, I needed to do a recharacterization so it would not be taxable and I would not incur penalties. It sounds like everything I did just dug a deeper hole.Thank you again.
Permalink Submitted by Alan - IRA critic on Mon, 2020-05-25 18:31
Permalink Submitted by Sue Kardon on Tue, 2020-05-26 00:09
I SOOOO appreciate all this info. The self-directed Roth IRA holds some land (real estate) assests. In the past, every November/December, I put in enough cash to pay the land taxes and the ETC maintenance fees; about $300-$400. I did that in Nov 2019 and paid the taxes and maintenance fees (beginning of 2020) and had $77 cash left in the ETC account when the ‘error’ was noted. I needed to get $400 back out to correct the issue. That’s when I was advised about the conversion, etc., etc., etc. I put in an additional $1500 so I wouldn’t run into this again over the next few years and that’s how I got to where I am: $77 already in the account + $1500 added to the Roth from a TIRA. Are there any small steps I can take to correct any part of this to reduce either the taxable event(s) or what might result in IRS penalties? Stupid question, but can anything be reversed? Thanks again!
Permalink Submitted by Alan - IRA critic on Tue, 2020-05-26 00:37
Any amount you deposit into the Roth is limited to your regular contribution limit, but with no earned income that limit is 0. Don’t know about prior years, but for 2019 you have made an excess Roth contribution of $400. The conversion makes more sense with this added info and is not a problem, as it adds cash to your Roth balance and provides from which to fund the return of your excess Roth contribution. So now you should be able to ask the Roth custodian to return your excess Roth contribution adjusted for gain or loss. I’ll guess that ETC is Equity Trust Co. They should use the IRS formula to determine the gain or loss and to utilize the formula they must use the market value for the real estate. They will then distribute the gain/loss adjusted amount to you and code the 1099R for 2020 which you will receive next January to show the amount of gain (if any) in Box 2a, which will be taxable in 2019. Box 7 must be coded “P J”to show a return of your 2019 excess Roth contribution. The amount in 2a (which you will know in advance by the amount of the check they send you and 2a would be the amount that exceeds the 400. So if you get back 450, there will be 50 to report as taxable income on your 2019 return because that is the year in which you made the excess contribution. The 50 would also be subject to 10% penalty if you are under 59.5 (the J part of the Box 7 code). If you get back less than 400 because of a loss, then there will be no income to report. This isn’t as bad as I thought it might be, more of a hassle to report (including the conversion) than anything else. What is the status of your 2019 return?
Permalink Submitted by Sue Kardon on Tue, 2020-05-26 17:00
2019 taxes still with CPA waiting to be filed by July 15. Trying to figure out this mess first. Otherwise, ready to go. This was the first time This happened; was earning income through 2018.
Permalink Submitted by Alan - IRA critic on Tue, 2020-05-26 17:44
You should request that the excess Roth distribution be returned to you ASAP. Then you can explain to the CPA that you removed the excess and tell her the amount of gains included, if any. The return should include an explanatory statement indicating the amount of your 2019 excess Roth contribution, and the date and amount that was returned to you. All this should cost is the tax and 10% penalty on any earnings. The conversion will of course be reported on your 2020 return, but the 2020 return will not need to report anything regarding the return of the excess, which is entirely reported on the 2019 return.
Permalink Submitted by Sue Kardon on Thu, 2020-05-28 01:13
DONE! And thank you sooooo much!!