Excess contribution to spouse's Roth?

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NOCODO
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Excess contribution to spouse's Roth?

Post by NOCODO »

Hi all,

I have a quick, and hopefully simple, question. If it's been answered before, please direct me to that thread. Thanks in advance.

This year (and last year) we contributed $5500 directly to my wife's Roth IRA. Due to income restrictions, I contributed to a tIRA and did a backdoor conversion both years. My wife stays home with the kids and doesn't have an earned income - thus, I was under the impression that she would qualify for a direct contribution. TurboTax was not under the same impression, and from what I gather, is reporting a 6% penalty on contributions and gains every year funds remain in that account.

I could use a little help understanding if I'm in the wrong or not and what action I need to do in the future to avoid this. :confused

Thanks all,
Brian
DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: Excess contribution to spouse's Roth?

Post by DSInvestor »

You and your spouse are subject to the same income limits for direct Roth IRA contributions. Your wife can recharacterize her 2014 and 2015 Roth IRA contributions to Traditional IRA contributions. The recharacterization of contributions will make it as though she contributed to Traditional IRA all along. Any growth or decline since investment will be like it happened in the Traditional IRA all along. Once the recharacterization of contribution is complete, she can convert all of Traditional IRA to Roth IRA.

If you were covered by an employer plan, her Traditional IRA contributions may be non-deductible depending on your income. If non-deductible, please make sure that your 2014 tax return includes form 8606 to track the IRA basis. Note that there is one income limit for the spouse who is covered and another (higher) limit for the spouse who is not covered.

See IRS page on IRA deduction limits:
http://www.irs.gov/Retirement-Plans/IRA ... ion-Limits
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NOCODO
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Location: Colorado

Re: Excess contribution to spouse's Roth?

Post by NOCODO »

Thanks DSInvestor,
You would think that with all I've learned from the Bogleheads that I'd realize the simple concept that her income = my income when filing jointly (ugg, it's more embarrassing when you write it out like that :oops: )

I've read a bit about the 8606 form and "tracking my IRA basis" but don't really understand why it's important.

My plan will be to recharacterize hers to a tIRA, then convert back to Roth. I will then call Fidelity's complaint line. I realize they aren't tax consultants, but shouldn't they stop me from placing two orders (one to my income restricted tIRA and one directly to my wife's Roth) on the same call??

Brian
DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: Excess contribution to spouse's Roth?

Post by DSInvestor »

NOCODO wrote:Thanks DSInvestor,
You would think that with all I've learned from the Bogleheads that I'd realize the simple concept that her income = my income when filing jointly (ugg, it's more embarrassing when you write it out like that :oops: )

I've read a bit about the 8606 form and "tracking my IRA basis" but don't really understand why it's important.

My plan will be to recharacterize hers to a tIRA, then convert back to Roth. I will then call Fidelity's complaint line. I realize they aren't tax consultants, but shouldn't they stop me from placing two orders (one to my income restricted tIRA and one directly to my wife's Roth) on the same call??

Brian
Form 8606 is important because if the T-IRA contribution was non-deductible, the basis needs to be tracked to avoid double taxation on conversion or withdrawal. If your $5500 contribution was non-deductible, that's money that you've already paid taxes on. If this $5500 basis is tracked in form 8606, it will allow you to withdraw that $5500 basis later without tax cost. If the basis was not tracked, you will pay taxes again on that $5500 when you withdraw or convert to Roth IRA.

Do not call the Fidelity complaint line. There are scenarios where it would make sense for one spouse to contribute to Roth IRA and the other spouse to Traditional IRA. Remember that IRA custodians do not have your tax situation or tax returns so they cannot know whether your income allows for Roth IRA contribution, traditional IRA contribution (deductible or non-deductible). Heck they don't even know if you have the required compensation to allow IRA contributions. It is up to you to determine what kind of IRA contributions you're eligible for. They just take the order.
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NOCODO
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Re: Excess contribution to spouse's Roth?

Post by NOCODO »

DS-
You're right on both fronts and I appreciate the perspective...

Where do I sign up for the 8606?

:)
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Excess contribution to spouse's Roth?

Post by DSInvestor »

NOCODO wrote:DS-
You're right on both fronts and I appreciate the perspective...

Where do I sign up for the 8606?

:)
If you enter Traditional IRA contributions into your 2014 tax software, the software will automatically include form 8606 if it determines that some or all of the Traditional IRA contribution is non-deductible. Form 8606 is per person so there may be one for you and another for your spouse.

If you use a tax preparer, make sure that you tell them about your IRA contributions and recharacterization of contributions. Their tax software will include 8606 forms if the TIRA contributions are non-deductible.

Note that if you contributed to TIRA in 2014 and converted in 2014, your 2014 8606 will have the $5500 basis and the conversion.
Your wife did not convert in calendar 2014 so her 2014 8606 will just have her contribution and no conversion. The basis from 2014 will carry forward to 2015 8606.
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