Alan S. wrote:Option 4 is actually Option 2, but instead of sending the corrective distribution to you, VG will deposit it back into the Roth as your 2014 contribution. You still will get a 1099R reporting the excess contribution distribution with tax and penalty on the earnings, but no 6% penalty.
Note that the VG suggestion also results in your 2013 total contribution being limited to the permitted Roth contribution in the phaseout range. The remainder does not become a non deductible TIRA contribution that you could convert to a Roth in the future, either as a back door Roth or as a partially taxable conversion should you have other non Roth IRAs.
Note that your Option 3 description does not produce extra taxes on your current return. Your Roth regular contributions are after tax and so are non deductible TIRA contributions. If you were to convert the TIRA recharacterized contribution back to the Roth, the earnings would be taxable and any other non Roth IRAs you might have would be included in the pro rate calculation of Form 8606. But no current tax for the amount of earnings recharacterized to TIRA.
In selecting an Option, the amount of earnings on your Roth contribution are a factor. If the earnings are substantial, that favors Option 1 because it retains all the earnings in the Roth. 2 and the VG option would be the worst because you would have to pay current tax and 10% penalty on those earnings.
Thanks Alan S. I guess I would have to reassess my initial plan and go with Option 1 (Pay the 6% penalty and adjust the 2014 Roth IRA contributions) instead. With the market's performance last year, the option to keep the earnings in Roth IRA seems to make more sense. By the way, for the adjustment to the 2014 Roth IRA contributions, is that equal to the excess amount contributed or does it also include the earnings on those excess contributions?