How much to withdraw from Roth IRA ( excess removal)

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Topic Author
haranoth
Posts: 151
Joined: Wed Apr 06, 2016 12:07 pm

How much to withdraw from Roth IRA ( excess removal)

Post by haranoth »

I posted in a different thread viewtopic.php?f=2&t=340549&p=5858560#p5858560
my issue, of Backdoor Roth conversion gone wrong. And after talking to a CPA, I decided that removing the entire amount, and paying the penalty is the most prudent thing for me to do. I currently have (let's assume) $3100 in that Roth IRA account.

However, when I contacted M1 finance to remove the money; they are charging me a account liquidation fee of $100, which I am fine with.
But, they are saying I need to leave back $100 back in that account, and remove $3000 dollar to my bank account.
I am wondering is that the right thing to do here?
I would have assumed that, I would
* remove the $3100 from the account
** pay the penalty of excess contribution
** + tax of whatever I earned last year to IRS.
**** And THEN pay the $100 liquidation fee as a separate thing.

Does leaving the 100 dollar in the account get marked as investment fee/loss..?

Bottom line is, M1 finance seems too much of a noob in terms of a brokerage. It took them 5 emails, and 2 weeks to tell me why my account liquidation is not going through. And oh, I fully blame them for not getting the backdoor roth conversion right.. I am not confident, whether they are asking me to do the right thing, by leaving 100 dollar in the account , stead of charging me the liquidation fee after the fact.
Hence, my post.

Thanks in advance, whoever can shed some light into what the correct thing to do here.
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by aristotelian »

I skimmed the other thread. I'm not seeing why you think you have an excess contribution. What you are describing would not be a removal of contribution, but rather an unqualified withdrawal with taxes and penalties, probably the worst thing you could do at this point.

Why not go ahead and do the conversion? As others said on the previous thread, you can do conversion at any time. Even the blog you linked to states that there is nothing illegal about it, it just makes the 8606 more complicated because you will have to do the pro rata calculation to determine the tax on gains. It really isn't a big deal and probably shouldn't even be listed as a "mistake"

Before you do anything rash, I would 1) transfer out of M1 Finance, 2) do conversion at your new broker.
Alan S.
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Location: Prescott, AZ

Re: How much to withdraw from Roth IRA ( excess removal)

Post by Alan S. »

I certainly cannot guarantee that any of the prior transactions were described correctly, or even completed. But here is what the majority of statements made appears to indicate.

1) The 2500 2019 Roth contribution was made and turned out to be an excess Roth contribution.
2) Some form of miscommunication with M1 resulted in no recharacterization to TIRA ever being done. There was no recharacterization 1099R issued (or it was lost). Also no 5498 for the TIRA receiving a recharacterization transfer.
3) If the funds never left the Roth IRA, the excess Roth contribution for 2019 will result in a 6% excise tax of $150 on a 2019 5329. A 2019 1040X should include that 5329, and should also include a corrected 8606 with 0's where the prior 8606 had figures. A brief explanation in the 1040 X box should be made outlining the reasons for the 1040 X.
4) A 2020 5329 should be filed by itself reporting another $150 excise tax for 2020.
5) At this time a regular distribution of 2500 should be requested from the Roth IRA. The gains remain in the Roth because the excess is being removed after the due date. There will be a 1099 R reporting this distribution, and it will be non taxable since it comes from regular Roth contributions. Form 8606 (Roth distribution) will be needed for 2021 to report this distribution. Finally, a 2021 5329 will be needed to report the elimination of the excess in 2021. No excise tax due for 2021.
6) The Roth IRA would still have a balance of around $600, so that should eliminate the M1 $100 account closing fee.
7) Total tax cost would be $300 from 2 years of excise taxes, and the 2500 ends up outside an IRA in the checking account.
8) There is still time to make a 2021 Non deductible TIRA contribution and convert it, so the 2500 could be used toward making that TIRA contribution. I assume MAGI is too high for a regular Roth contribution for all these years.

Again, if M1 statements turn up and show otherwise, or other prior year 1099R forms for distributions or recharacterizations, or 5498 forms show up, all the above will be nullified.
Topic Author
haranoth
Posts: 151
Joined: Wed Apr 06, 2016 12:07 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by haranoth »

thanks Alan.
I think, I followed upto step 5, but need some clarification of step 6.
The IRS rules say I need to remove the excess contribution and gains. So, I should remove the entire amount of 2500(contribution) + 600 (gains) ?
Why is the 600 left at the Roth IRA account?
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by aristotelian »

haranoth wrote: Mon Oct 25, 2021 9:27 pm thanks Alan.
I think, I followed upto step 5, but need some clarification of step 6.
The IRS rules say I need to remove the excess contribution and gains. So, I should remove the entire amount of 2500(contribution) + 600 (gains) ?
Why is the 600 left at the Roth IRA account?
Is #3 [funds never left the Roth IRA] correct? How did you not notice that when you requested the "backdoor Roth"? Seems more likely that the funds were transferred and you are missing the 1099R. You should be able to find it in the account documents on the website. Have you tried calling M1? They don't make it easy but they do have a phone number to talk to a human, 312-600-2883. I have had much better results talking to them than communicating through email.
Topic Author
haranoth
Posts: 151
Joined: Wed Apr 06, 2016 12:07 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by haranoth »

Hi aristotelian ,
I have contacted them multiple times ( 3 months ago , for a period of a month and half), and they basically mentioned, there is nothing they can do, since April 15th has passed, and basically asked me to talk to a CPA.

Is #3 [funds never left the Roth IRA] correct? How did you not notice that when you requested the "backdoor Roth"? S
I did request the backdoor roth through email/support portal, since at the time their web interface was confusing and I wanted to be sure that the Backdoor Roth was performed correctly. So I did ask them through their support / online portal And they told me it was done (but it wasn't, and I only found out when I didnt get a 1099R).
Unfortunately, their support logs are either purged or blocked behind some 3rd party provider and I cannot access the support request where I asked them specifically for "backdoor Roth". However, the issue has been escalated couple of times, with each times the answer being "Sorry, April 15th passed, so you are on your own"

This has left such a bad taste , that I am ready to pay the penalty and move on. I love their "rebalance" feature, but it's not worth the headache they have caused me. I just wanna get done with M1 at this point. Would rather do all my transactions at Schwab or fidelity from now on.

I want to figure out the least path of resistance/work , pay the penalty, do the taxes and move on
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by aristotelian »

haranoth wrote: Tue Oct 26, 2021 10:50 am Hi aristotelian ,
I have contacted them multiple times ( 3 months ago , for a period of a month and half), and they basically mentioned, there is nothing they can do, since April 15th has passed, and basically asked me to talk to a CPA.

Is #3 [funds never left the Roth IRA] correct? How did you not notice that when you requested the "backdoor Roth"? S
I did request the backdoor roth through email/support portal, since at the time their web interface was confusing and I wanted to be sure that the Backdoor Roth was performed correctly. So I did ask them through their support / online portal And they told me it was done (but it wasn't, and I only found out when I didnt get a 1099R).
Unfortunately, their support logs are either purged or blocked behind some 3rd party provider and I cannot access the support request where I asked them specifically for "backdoor Roth". However, the issue has been escalated couple of times, with each times the answer being "Sorry, April 15th passed, so you are on your own"

This has left such a bad taste , that I am ready to pay the penalty and move on. I love their "rebalance" feature, but it's not worth the headache they have caused me. I just wanna get done with M1 at this point. Would rather do all my transactions at Schwab or fidelity from now on.

I want to figure out the least path of resistance/work , pay the penalty, do the taxes and move on
That makes sense now. If you had earnings I believe you are correct that they will come out along with the contribution. The $100 fee should come from the earnings so my best guess is you would be taxed on $500 in earnings.
FactualFran
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Re: How much to withdraw from Roth IRA ( excess removal)

Post by FactualFran »

haranoth wrote: Mon Oct 25, 2021 11:31 am However, when I contacted M1 finance to remove the money; they are charging me a account liquidation fee of $100, which I am fine with.
But, they are saying I need to leave back $100 back in that account, and remove $3000 dollar to my bank account.
Confirm with the IRA custodian that they will not accept a request to distribute the entire balance of the IRA, rather than a dollar amount, and send to your bank account an amount equal to the balance when the distribution transaction is done minus the liquidation fee.
FactualFran
Posts: 2751
Joined: Sat Feb 21, 2015 1:29 pm

Re: How much to withdraw from Roth IRA ( excess removal)

Post by FactualFran »

haranoth wrote: Mon Oct 25, 2021 9:27 pm thanks Alan.
I think, I followed upto step 5, but need some clarification of step 6.
The IRS rules say I need to remove the excess contribution and gains. So, I should remove the entire amount of 2500(contribution) + 600 (gains) ?
Why is the 600 left at the Roth IRA account?
A transaction to withdraw a contribution and earnings associated with it, while the contribution was in an IRA, is a different type of transaction than taking a distribution. When a contribution and earnings associated with it are withdrawn, it is as if the contribution had not been made. Taking a distribution does not undo the fact that a contribution was made and may have been in excess of the amount allowed.

Leaving the $600 of earnings in the Roth IRA, rather than taking a distribution amount that includes the earnings, avoids owing income tax and an early withdrawal penalty on the $600. The Roth IRA can be transferred to another IRA custodian, such as one of the brokerages you mentioned in a previous post.
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