How to revert Roth IRA contribution when income eligibility exceeded

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kambyvk
Posts: 6
Joined: Wed Mar 06, 2019 11:47 am

How to revert Roth IRA contribution when income eligibility exceeded

Post by kambyvk » Mon Dec 02, 2019 4:09 am

I made Roth IRA contributions in 2018 and 2019 and in hindsight my income in both years exceeded the MAGI levels stipulated to be eligible for contribution. The contribution amount ($6500+$7000=$13500) is the only amount sitting anywhere in a Roth IRA account for me, in this case at Fidelity. What I have read on this forum and elsewhere on similar situations is to either recharacterize to a traditional IRA or move the contribution to the following year, if the income is expected to fall below the MAGI threshold. My income level exceeds limits for traditional IRA contributions for both FY 2018 and 2019 so recharacterization is out and although I will fall below the MAGI threshold next year, I will have no earned income (retired, with all settlements from my former employer paid out this year) so I don’t think I can contribute to either type of IRA.

In this situation is my only recourse to pay the penalty (I understand it is 6% per year) and have the remaining amount deposited in my taxable cash account, which is where the contributions were sourced from to start with? Further, is the penalty applicable on the full contribution amount or only to any earnings on the contribution since the time of contribution?

Many thanks in advance for your help.

ivk5
Posts: 989
Joined: Thu Sep 22, 2016 9:05 am

Re: HOW TO REVERT ROTH IRA CONTRIBUTION WHEN INCOME ELIGIBILITY EXCEEDED

Post by ivk5 » Mon Dec 02, 2019 4:23 am

There is no income limit for tIRA contribution, only for deducting the contribution from income. You can recharacterize to (non-deductible) tIRA for 2019.

If you have no other tIRA accounts in your name, note that you can subsequently convert the recharacterized amount from traditional to Roth. (Lookup Backdoor Roth in wiki.) If you have other tIRA funds, that will be undesirable.

For 2018 the recharacterization deadline has passed (Oct 15, 2019 for most taxpayers). So I think you’ll have to pay the excise tax and withdraw. Why wasn’t this flagged by your 2018 tax software/preparer? That should have been routine.

All caps title not necessary (no need to shout).

Topic Author
kambyvk
Posts: 6
Joined: Wed Mar 06, 2019 11:47 am

Re: HOW TO REVERT ROTH IRA CONTRIBUTION WHEN INCOME ELIGIBILITY EXCEEDED

Post by kambyvk » Mon Dec 02, 2019 11:15 am

First of all, apologies. The intention was not to shout, copied the contents from a Word document where I typed the post and the header was in caps, should have been bit more aware of how this may come across.

Thanks for your response. I could recharacterize the 2019 contribution to a tIRA but subsequent backdoor Roth will not be straightforward as I do have another Rollover tIRA already. For 2018, good to know that paying the penalty and withdrawing is the only option. I can get going on this. Much appreciated.

Topic Author
kambyvk
Posts: 6
Joined: Wed Mar 06, 2019 11:47 am

Re: HOW TO REVERT ROTH IRA CONTRIBUTION WHEN INCOME ELIGIBILITY EXCEEDED

Post by kambyvk » Mon Dec 02, 2019 11:38 am

Just completed recharacterizing 2019 to tIRA and did a "return of excess" for 2018 (6% penalty). Fidelity rep took me thru the process for both and it was quite easy. Thanks again!

lakpr
Posts: 3093
Joined: Fri Mar 18, 2011 9:59 am

Re: HOW TO REVERT ROTH IRA CONTRIBUTION WHEN INCOME ELIGIBILITY EXCEEDED

Post by lakpr » Mon Dec 02, 2019 11:43 am

kambyvk wrote:
Mon Dec 02, 2019 11:38 am
Just completed recharacterizing 2019 to tIRA and did a "return of excess" for 2018 (6% penalty). Fidelity rep took me thru the process for both and it was quite easy. Thanks again!
Uh oh :(

Since you said you have a Rollover IRA, and now you have this non-deductible traditional IRA ... any withdrawal from either IRA in the future will be treated as a proportional withdrawal from non-deductible IRA (non-taxable) and Rollover IRA (taxable). You are now forever wedded to Form 8606 throughout your life for any withdrawals made from either the Rollover IRA or the traditional IRA. For what it is worth, I hope you keep them separate and do NOT mix them together.

I see that you are retired, and presumably not looking to work again and are looking to live off the Rollover IRA. If you can get at least a part time job with a 401k long enough to roll the Rollover IRA into it ... then you can convert the non-deductible IRA to Roth IRA again and then retire again for good (and do NOT roll the 401k into a Rollover IRA again the same calendar year you did the Roth conversion).

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