Another option for Excess contributions to 2013 Roth IRA?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Another option for Excess contributions to 2013 Roth IRA?

Postby Van-Guard23 » Mon Feb 10, 2014 8:05 pm

I just did my “preliminary” tax computations and found out that our combined modified AGI falls between $178,000 and $188,000 (married filing jointly) which reduced the amount we can contribute towards our Roth IRA, from combined $11,000 to just $7,180. I have read multiple postings on this topic by fellow Bogleheads from previous years and have seen options such as:
1. Just pay the 6% penalty ($230) on excess contributions and earnings and adjust following year Roth IRA contributions
2. Take excess withdrawal (plus earnings) and pay taxes on those
3. Re-characterize excess contributions plus earnings to a Traditional IRA and pay taxes on those

I am considering a 4th option of just moving our excess 2013 Roth IRA contributions (plus earnings) to 2014 Roth IRA contribution and pay taxes on earnings. The Vanguard representative I spoke to indicated I can do this. Is there any reason why I shouldn’t go for this option instead of the first three? It seems similar to option 1 but without the 6% penalty.
"I have only come here seeking knowledge. Things they wouldn't teach me of in college" | The Police "Wrapped Around Your Finger"
User avatar
Van-Guard23
 
Posts: 144
Joined: Fri Jan 04, 2008 11:10 pm
Location: Hawaii

Re: Another option for Excess contributions to 2013 Roth IRA

Postby Alan S. » Mon Feb 10, 2014 9:39 pm

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.
Alan S.
 
Posts: 3754
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Another option for Excess contributions to 2013 Roth IRA

Postby Van-Guard23 » Mon Feb 10, 2014 10:17 pm

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?
"I have only come here seeking knowledge. Things they wouldn't teach me of in college" | The Police "Wrapped Around Your Finger"
User avatar
Van-Guard23
 
Posts: 144
Joined: Fri Jan 04, 2008 11:10 pm
Location: Hawaii

Re: Another option for Excess contributions to 2013 Roth IRA

Postby Alan S. » Mon Feb 10, 2014 10:32 pm

Just the contribution amount itself, not the earnings. In other words, you each would only contribute 3,590 for your 2014 Roth contributions. You each would file a 5329 with your return to report the 6% excise tax on 1,910 for 2013. And then a 5329 with your 2014 return to show that you applied the excess to your 2014 contribution. No further penalty for 2014.

However, you need to be reasonably sure your 2014 income will not be too high to apply your excess (181k-191k phaseout range). If that appears to be the case you could still recharacterize the excess to TIRA up to 10/15. The earnings on that portion would not be taxable currently, but would eventually be when distributed from the TIRA.

Best to do the latter before you file unless you don't mind extending or amending your 2013 return to get your 6% back and file an 8606 to report a non deductible TIRA contribution. The hassle factor exists with all these options.
Alan S.
 
Posts: 3754
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Another option for Excess contributions to 2013 Roth IRA

Postby Van-Guard23 » Mon Feb 10, 2014 10:44 pm

Excellent...thanks again. I should be able to proceed with my 2013 tax return, then hold it for a couple of months before I file in April since I am paying the IRS this year.

Yes, I'm fairly certain that we would not hit the phaseout range for 2014, so I should be able to avoid that rigmarole.
"I have only come here seeking knowledge. Things they wouldn't teach me of in college" | The Police "Wrapped Around Your Finger"
User avatar
Van-Guard23
 
Posts: 144
Joined: Fri Jan 04, 2008 11:10 pm
Location: Hawaii


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: Mrxyz, Peculiar_Investor, retiredjg, Scooter57, scouter, Userdc, Yahoo [Bot], yeledbed and 78 guests