Recharacterization madness: Roth excess contribution --> TIRA --> Roth

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icedtea
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Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Mon Feb 27, 2017 6:03 pm

I just learned that I made excess Roth IRA contributions in 2016 and 2017. I'm glad my income level has gone up. In the process I now know I can't simply keep putting $5500 into my Roth every year. I got some help on this forum in another thread about my options, and it seems what may be best is if I recharacterize the 2016 excess (a little over $2200) to my TIRA, and then do a backdoor Roth conversion of that same amount back to the Roth.

Some info for context:

- the money above was after tax before it went into my Roth of course
- if a recharacterize to TIRA, it won't be tax deductible due to my income limit
- if a then convert back to Roth, I believe (correct me if I'm wrong) that I won't have to pay any further taxes on the money

Any thoughts? Any factors I left out that I should consider?

I suspect whatever I do for the 2016 excess Roth contribution, I would do again early next year for my 2017 taxes, once I know what my excess contribution is. I have a feeling it'll be closer to the full $5500.

Thanks,
Iced Tea

Alan S.
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Mon Feb 27, 2017 6:14 pm

Do you have any TIRA balance at this time?

You have contributed 5500 to a Roth for 2016.
Have you made a 2017 contribution yet? If not, when do you plan to?

icedtea
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Mon Feb 27, 2017 6:17 pm

Alan S. wrote:Do you have any TIRA balance at this time?

You have contributed 5500 to a Roth for 2016.
Have you made a 2017 contribution yet? If not, when do you plan to?


I have a TIRA balance. It stems from various 401k rollovers. Is that going to be an issue for this strategy?

I already made my 2017 Roth contribution. I max'd in January.

Alan S.
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Mon Feb 27, 2017 6:48 pm

Yes, major issue. Because you have the rollover IRA which is probably entirely pre tax, your back door Roth conversion will be mostly taxable. You cannot isolate your conversion to the after tax contribution amount unless you were to roll the pre tax balance of your TIRA into your employer plan. That is not likely to be worth the hassle unless your plan has low expense options and you expect to do back door Roth for a few year.

In other words, if you recharacterize the excess Roth contributions as non deductible TIRA contributions and then convert, the conversion will be taxed under the pro rate methodology of Form 8606.

A taxable conversion is obviously inferior to a non taxable conversion, but that does not make it bad if your tax rate on the conversion is less than what you expect in retirement.

Of course, you could just remove the excess contribution and invest in taxable. You would owe tax and penalty on any gains on the excess amount. Another option if you have real good gains on the 2016 contribution is to pay the excise tax of 6% on the excess amount with your 2016 return. You cannot apply the excess to 2017 because you already made that contribution, but by paying the 6% you would protect the gains. Then after October just take a distribution of the excess amount (no earnings) and leave the gains in the Roth IRA. To figure whether removal or paying the excise tax is best, compare the 6% excise tax against ordinary income tax plus 10% penalty on the gains. Of course, you would have to be able to calculate the gains according to IRS formula.

All these various solutions have different comparative benefits and drawbacks beyond just the current tax bill.

icedtea
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sat Mar 04, 2017 1:29 pm

Alan S. wrote:Yes, major issue. Because you have the rollover IRA which is probably entirely pre tax, your back door Roth conversion will be mostly taxable. You cannot isolate your conversion to the after tax contribution amount unless you were to roll the pre tax balance of your TIRA into your employer plan. That is not likely to be worth the hassle unless your plan has low expense options and you expect to do back door Roth for a few year.

In other words, if you recharacterize the excess Roth contributions as non deductible TIRA contributions and then convert, the conversion will be taxed under the pro rate methodology of Form 8606.

A taxable conversion is obviously inferior to a non taxable conversion, but that does not make it bad if your tax rate on the conversion is less than what you expect in retirement.

Of course, you could just remove the excess contribution and invest in taxable. You would owe tax and penalty on any gains on the excess amount. Another option if you have real good gains on the 2016 contribution is to pay the excise tax of 6% on the excess amount with your 2016 return. You cannot apply the excess to 2017 because you already made that contribution, but by paying the 6% you would protect the gains. Then after October just take a distribution of the excess amount (no earnings) and leave the gains in the Roth IRA. To figure whether removal or paying the excise tax is best, compare the 6% excise tax against ordinary income tax plus 10% penalty on the gains. Of course, you would have to be able to calculate the gains according to IRS formula.

All these various solutions have different comparative benefits and drawbacks beyond just the current tax bill.


I'm just seeing your reply, Alan. Thanks very much for this.

I just started a new job and I have access to a 401k starting April 1. I'm not sure which funds are available yet, I just know there's no match. If I have access to low-cost index funds from Vanguard or Fidelity, it might be worth it. My TIRA is all pretax (401k rollovers) with $128K in VBTLX and $59K in VTSAX with Vanguard. I should have all the details on the 401k funds in about 10 days. If the funds have low ERs, would I need to shift the pretax money from my TIRA to my 401k AND execute the Roth excess recharacterization-->TIRA-->backdoor Roth all by April 15? Or can I file an extension on my taxes and get more time for all of this?

In case the above route doesn't make sense in the end, can you point me to guidance online regarding how I can calculate the gains on my excess Roth contribution from 2016? This is the hard part for me, if I choose to remove or pay the excise tax. I'm using Avg Cost Basis with Vanguard, and I don't track individual contributions outside of Vanguard.

A couple more questions, if you'd be so kind:

How does one pay the excise tax of 6% on the excess amount with their 2016 return, using Tax Act?
Why would I wait till after October 2017 to take the distribution of the excess amount from my Roth?

This stuff is all complex for me, so I feel somewhat over my head. But given the amount of excess, I don't think this is worth hiring a CPA.

Thanks,
Iced Tea

icedtea
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sun Mar 05, 2017 12:08 pm

I've edited this post substantially since I first published it

OP here again. For calculating gains on an excess contribution, I found this info: https://www08.wellsfargomedia.com/asset ... utions.pdf

Does anyone know what a 'consolidation' means? (see below text)
I'm able to look up Buys, Transfers and Distributions on Vanguard but I don't see anything about Consolidations.

---------

How to calculate earnings or losses
The IRS provides a specific formula — Net Income Attributable (NIA) — that must be applied to calculate earnings or losses
attributable to an excess contribution.
Net Income = Excess to be removed x Adjusted Closing Balance (ACB) – Adjusted Opening Balance (AOB)
Adjusted Opening Balance
Here’s how to determine the numbers to plug into the NIA formula: To determine the adjusted opening account value, add to the prior
month end IRA balance all contributions (including the contribution creating the excess), consolidations, and transfers into the account
since the contribution occurred. To determine the adjusted closing balance, subtract from the current value of the IRA all distributions,
consolidations, and transfers in since the contribution occurred.

---------

If I assume that I had no "consolidations,' since I contributed the excess in January 2016, then I think I've correctly followed this formula to calculate my gains. Here's a breakdown of what I did. Does this seem correct?

1. 2016 Excess contributions
- Tax Act says according to my income, my Roth limit was $3220. So that's $2280 in excess. I max'd my Roth in 2016 with two contributions:
1/6: 4k
1/13: 1,500

2. According to my Vanguard end of 2015 statement, my Roth balance was 129,921.45.
So, AOB = $140921.45
Formula: end of dec 2015 balance of $129,921.45 + my 2016 and 2017 Roth contributions of 4000 + 1500 + 3850 + 1650 = $140921.45 (There were no transfers and I have no idea what a consolidation is)

3. ACB = $156,660.05
Formula: $160,097.93 (current Roth balance as of Mar 5) - 3437.88 = $156,660.05. (The 3437.88 is a sum of all distributions since Jan 6, 2016, according to Vanguard. There were no transfers and once again, I have no idea what a consolidation is.)

4. NIA= $254.64 = the estimated earnings on the excess
Formula: 2280 x [(156,660.05 - 140921.45)/140921.45]

5. If NIA is $254.64, then I should remove $2535 (ie. 2280+254.64) from Roth IRA by April 18th.

Open questions:

- Can I use this calculation or do I need to refresh it by inputting the current Roth balance as of the day I file my taxes?

- How do I report this to the IRS in Tax Act? I understand that if I remove the $2535 from my Roth by April 18, then I pay a 10% penalty on the $254.64 in earnings but no taxes on the excess contribution, right?

- Should I just cash out the $2535? Or am I able to recharacterize the money as a non-deductible TIRA and then convert it into a Backdoor Roth? A CPA I spoke with on the phone said this is possible but I'm not so sure. Like I said above, my existing TIRA is pretax.

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Epsilon Delta
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Epsilon Delta » Sun Mar 05, 2017 2:40 pm

icedtea wrote:In case the above route doesn't make sense in the end, can you point me to guidance online regarding how I can calculate the gains on my excess Roth contribution from 2016?

With mutual funds at Vanguard, Vanguard will calculate the earnings for you. I don't believe you have the option of ignoring Vanguards calculation and doing it yourself. If you want to estimate the earnings you have the correct formula. Note that this uses the value of the account at the time of the transaction (withdrawal of earnings), not the date you file your tax return. I believe consolidation refers to combining two separate IRAs into one, something you probably didn't do.
icedtea wrote:How does one pay the excise tax of 6% on the excess amount with their 2016 return, using Tax Act?

This is on form 5329. Not a user of Tax Act and not a fan of interviews so I'm not sure what interview question would force the form. If you fill in 5329 the tax due flows to form 1040 and you pay it along with regular income taxes (or it reduces your refund).

icedtea wrote:Why would I wait till after October 2017 to take the distribution of the excess amount from my Roth?


There are different rules for a timely correction (before the extended due date) and a later correction. You can select between the rules by timing your actions.

If you withdraw the excess before the extended due date (Oct 15) you need to withdraw the contributions and earnings on those contributions. This avoids the 6% excise tax on the excess contribution but you have to withdraw the earnings.

After the extended due date it's too late to avoid the 6% excise tax but you only have to withdraw the excess contribution and can leave the earnings in the account. Also withdrawing as late in the year as possible increases the (expected) earnings in the IRA without incurring extra tax.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sun Mar 05, 2017 10:48 pm

Epsilon Delta wrote:
icedtea wrote:In case the above route doesn't make sense in the end, can you point me to guidance online regarding how I can calculate the gains on my excess Roth contribution from 2016?

With mutual funds at Vanguard, Vanguard will calculate the earnings for you. I don't believe you have the option of ignoring Vanguards calculation and doing it yourself. If you want to estimate the earnings you have the correct formula. Note that this uses the value of the account at the time of the transaction (withdrawal of earnings), not the date you file your tax return. I believe consolidation refers to combining two separate IRAs into one, something you probably didn't do.
icedtea wrote:How does one pay the excise tax of 6% on the excess amount with their 2016 return, using Tax Act?

This is on form 5329. Not a user of Tax Act and not a fan of interviews so I'm not sure what interview question would force the form. If you fill in 5329 the tax due flows to form 1040 and you pay it along with regular income taxes (or it reduces your refund).

icedtea wrote:Why would I wait till after October 2017 to take the distribution of the excess amount from my Roth?


There are different rules for a timely correction (before the extended due date) and a later correction. You can select between the rules by timing your actions.

If you withdraw the excess before the extended due date (Oct 15) you need to withdraw the contributions and earnings on those contributions. This avoids the 6% excise tax on the excess contribution but you have to withdraw the earnings.

After the extended due date it's too late to avoid the 6% excise tax but you only have to withdraw the excess contribution and can leave the earnings in the account. Also withdrawing as late in the year as possible increases the (expected) earnings in the IRA without incurring extra tax.


Thanks Epsilon Delta. I didn't realize Vanguard would calculate the gains. I called them once before about a similar request and they said they couldn't isolate the gains on just a single contribution to a fund. I'll call them tomorrow.

Assuming the estimated gains is correct (for the sake of it), we're talking about 2280 in excess and 255 in gains. I was planning to withdraw this total sum before April 18 and be done with it. Instead of cashing out, would it be more advantageous to open up a separate TIRA, a non-deductible one, and recharacterize the excess and gains? Once again, I don't know if this is even a legit move. I have an existing pretax TIRA.

I didn't know about the option to wait ''till after the extended due date. That could end up being better if the mutual fund keeps rising but then again, it all depends. I could be missing something here, but since the amounts in question -- 2280 and 255 -- are relatively small, it seems like it's not going to make much of a difference in the end. Is that fair to say?

Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Epsilon Delta » Mon Mar 13, 2017 3:54 pm

icedtea wrote:
Thanks Epsilon Delta. I didn't realize Vanguard would calculate the gains. I called them once before about a similar request and they said they couldn't isolate the gains on just a single contribution to a fund. I'll call them tomorrow.

Assuming the estimated gains is correct (for the sake of it), we're talking about 2280 in excess and 255 in gains. I was planning to withdraw this total sum before April 18 and be done with it. Instead of cashing out, would it be more advantageous to open up a separate TIRA, a non-deductible one, and recharacterize the excess and gains? Once again, I don't know if this is even a legit move. I have an existing pretax TIRA.

Recharacterizing the excess and gains to a traditional IRA and treating that as a non-deductible contribution to the traditional IRA is a legal option. But it probably isn't a good option for you. Making non-deductible contributions to an IRA and leaving them in the IRA is arguably worse than investing the money in a taxable account. In most cases I would only recommend a non-deductible contribution if you can convert it to a Roth before it earns substantial gains, that is do a "backdoor Roth contribution". In your case an existing IRA with pretax contributions will increase the taxes on any conversions. These are generalities, there are a lot of details that matter here, the size of the IRA, the possibility of rolling your IRA into a 401(k), if you expect to have a low income year in in the next 5 years, ... .

icedtea wrote:I didn't know about the option to wait ''till after the extended due date. That could end up being better if the mutual fund keeps rising but then again, it all depends. I could be missing something here, but since the amounts in question -- 2280 and 255 -- are relatively small, it seems like it's not going to make much of a difference in the end. Is that fair to say?
Iced Tea

That sounds fair.
255/2280 is 11% which is a fairly decent gain. If you leave it until after October you pay 6% on 2280 or $137. If you fix it before then you pay ordinary income tax plus a 10% early withdrawal penalty on the $255. In the 25% tax bracket thats $89. And in the first option you have an extra $255 in a Roth, which is worth something, pulling a number out of my hat 10% seems about right. So a difference of less than $50, perhaps about $20. Small or large is up to you. It's big enough for me to go after, but small enough that I'll give up if it's too much work.

icedtea
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Mon Mar 13, 2017 3:57 pm

Any help on this one? I got through to Vanguard and they said they couldn't tell me the gains on the excess contribution until the next day. They said I needed to decide if I wanted to do a recharacterization to TIRA or just remove the excess and gains before they would be able to process this and identify the gains on the excess. So, I told them I'd call them back.

Seems to me there isn't really a tax advantage for doing a recharacterization to TIRA vs. removing the excess and gains from the Roth and getting a check. Am I right?

If so, I'd prefer to just withdraw it so I don't have to worry about that slice of my TIRA being post-tax.

EDIT: Looks like I posted right when the previous post came through. Thanks for the help Epsilon Delta. I think I'll just remove it before April 18. I couldn't really follow the breakdown you provided about $50 or $20, maybe I've just been working too much and my head is tired :oops:

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Mon Mar 13, 2017 9:34 pm

icedtea wrote:Any help on this one? I got through to Vanguard and they said they couldn't tell me the gains on the excess contribution until the next day. They said I needed to decide if I wanted to do a recharacterization to TIRA or just remove the excess and gains before they would be able to process this and identify the gains on the excess. So, I told them I'd call them back.


Seems to me there isn't really a tax advantage for doing a recharacterization to TIRA vs. removing the excess and gains from the Roth and getting a check. Am I right?

A recharacterization will cost you less now, but you will then have basis in your TIRA as long as you have a TIRA. An 8606 would be necessary for the rest of your life. So you would probably just withdraw the excess and earnings.

If so, I'd prefer to just withdraw it so I don't have to worry about that slice of my TIRA being post-tax.

Yes, but now another problem rears it's head. The earnings you withdraw are taxable in the year you made the contribution (2016). That means your MAGI goes up another 255 on your 2016 return and the FURTHER REDUCES your allowed 2016 Roth contribution. So it's a chicken and egg situation. There are two approaches possible to deal with this.
1) Do some math and ask for the return of enough extra so that you eliminate the chance of any excess due to your MAGI being increased by the earnings. Probably $300 would do it, so you would ask for a return of 2580 instead of 2280. That will reduce your contribution enough to that you have no excess due to the earnings in your MAGI.
2) If the above sounds like too much of a hassle with no guarantee what the extra couple of days market activity will be in addition, you could just ask for the return of 2280 and then pay the 6% excise tax on the small amount of excess remaining. Probably about $20 excise tax. Then reduce your 2017 contribution by the amount of the excess to eliminate the excess after one year by allowing Form 5329 to apply the 2016 excess remaining to 2017.

As mentioned before, if you do nothing your excise tax would be 6% of 2280 or $137. Not good, but you would not have to request anything from VG and all earnings on the excess will stay in the Roth. But you would have to remove 2280 of your 2017 contribution to make space to apply the 2280 to 2017.

The phaseout range is a particular mess when it comes to removing an excess contribution and having your MAGI go up again on the earnings. If you had an investment loss, then no problem. It's a nasty choice of less than ideal solutions.



EDIT: Looks like I posted right when the previous post came through. Thanks for the help Epsilon Delta. I think I'll just remove it before April 18. I couldn't really follow the breakdown you provided about $50 or $20, maybe I've just been working too much and my head is tired :oops:

Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by jsprandel » Mon Mar 13, 2017 10:10 pm

I've done the backdoor IRA for several years and know how to enter it on the 8606. However, last year I screwed up and am not sure how to complete the form. I'm in the catchup category and attempted to fund my IRA in two transactions. I put $3,500 into a TIRA, but accidentally put the other $3,000 directly into the Roth instead of the TIRA. To correct the error, I recharacterized the $3,000 to the TIRA (now $2834 because the investment went down). Later, I converted the $3,500 + $2834 (originally $3,000) TIRA to a Roth. I'm pretty sure, I'll have to include an explanation with my return, but does anyone know how I should complete the 8606?

Thanks is advance for any assistance you can give!

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Epsilon Delta » Tue Mar 14, 2017 1:49 am

Epsilon Delta wrote:255/2280 is 11% which is a fairly decent gain. If you leave it until after October you pay 6% on 2280 or $137. If you fix it before then you pay ordinary income tax plus a 10% early withdrawal penalty on the $255. In the 25% tax bracket thats $89. And in the first option you have an extra $255 in a Roth, which is worth something, pulling a number out of my hat 10% seems about right. So a difference of less than $50, perhaps about $20. Small or large is up to you. It's big enough for me to go after, but small enough that I'll give up if it's too much work.

I'll try to make it a bit clearer.

If you leave the full excess in for 2016 and correct it in 2017 the 6% excise tax due in 2016 will be $137
If you take a corrective distribution the income tax and penalty due in 2016 will be $89. (Assuming 25% tax bracket, you can substitute your own bracket if you know it).

The difference between the two choices is $137 - $89 = $48, or about $50, since it really can't be predicted to the dollar without knowing pretty much everything on your tax return.

Now the $48 is the difference in the amount due with your 2016 tax return. But correcting after Oct. leaves you with an extra $255 in a Roth compared to withdrawing the earnings. Having money in a Roth will save future taxes on future earnings. I take a guess that this future tax savings is worth $25 in current dollars. So instead of the difference in just 2016 being $48 we have a difference over the rest of your life (in current dollars) of $48 - $25 = $23, or about $20 (since again I really can't predict this to two significant figures).

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sat Mar 18, 2017 1:04 pm

Alan S. wrote: The earnings you withdraw are taxable in the year you made the contribution (2016). That means your MAGI goes up another 255 on your 2016 return and the FURTHER REDUCES your allowed 2016 Roth contribution. So it's a chicken and egg situation. There are two approaches possible to deal with this.
1) Do some math and ask for the return of enough extra so that you eliminate the chance of any excess due to your MAGI being increased by the earnings. Probably $300 would do it, so you would ask for a return of 2580 instead of 2280. That will reduce your contribution enough to that you have no excess due to the earnings in your MAGI.
2) If the above sounds like too much of a hassle with no guarantee what the extra couple of days market activity will be in addition, you could just ask for the return of 2280 and then pay the 6% excise tax on the small amount of excess remaining. Probably about $20 excise tax. Then reduce your 2017 contribution by the amount of the excess to eliminate the excess after one year by allowing Form 5329 to apply the 2016 excess remaining to 2017.

As mentioned before, if you do nothing your excise tax would be 6% of 2280 or $137. Not good, but you would not have to request anything from VG and all earnings on the excess will stay in the Roth. But you would have to remove 2280 of your 2017 contribution to make space to apply the 2280 to 2017.


Hi Alan S,

Thanks for breaking this down (and to Epsilon Delta again, too).

Given what's been shared I plan to withdraw the excess and gains with Vanguard and be done with it.

About point 2 above, I already max'd my 2017 Roth contribution so I have no room to adjust it. I have a feeling I will once again have an excess for 2017 when tax time comes, since my income is similar. So, what should I plan to do? Am I better off going with your #1 option and withdrawing an extra $300 from my Roth now?

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Sat Mar 18, 2017 2:54 pm

If you were sure that your 2017 MAGI would allow a full Roth contribution, you could ask for a return of enough of your 2017 contribution to create the space to apply your 2016 excess to 2017. But since your MAGI seems destined to be in or around the phaseout range for 2017 and beyond, there is not much sense in doing that since you may not be able to even apply the excess.

Do you know enough about your new plan and whether you CAN or WANT TO roll your pre tax TIRA balance into that plan this year? If you do that you could then recharacterize your 2016 Roth excess as a TIRA non deductible TIRA contribution and convert it back to Roth tax free. That would solve the annual MAGI problem because you can always make a non deductible TIRA contribution and then convert it. Effectively that would give you a full Roth contribution and you could do it early in the year so that gains would be Roth gains. That would also eliminate withdrawing excess contributions and earnings that trigger the chicken and egg situation every year. However, your plan may have high expenses or NOT accept IRA rollovers.

If you eliminate the idea of rolling your present pre tax TIRAs into the plan, then you have the prior two options of either removing the known excess or removing the estimated additional excess after adding in the earnings as taxable income for 2016.

Going forward, you could eliminate some of this hassle by no longer contributing early. Let's take 2018 as an example. If you wait and contribute for 2018 in March, 2019 you will know exactly how much of a Roth contribution you can make. You then make that contribution but you no longer have to worry about removing an excess contribution or excise taxes. If income too high to contribute, then invest in taxable. Or if your 401k has a Roth option you could contribute to that instead - up to 18k instead of just 5500 as allowed for a Roth IRA. Again, the expenses and plan investments are a factor. Doing Roth 401 deferrals will increase your MAGI as well, making Roth IRA contributions that much more unlikely.

So there are many options - problem is that none of that are ideal. Further, some of them that will save a hassle in the future involve more up front hassles to deal with.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by AndrewXnn » Sat Mar 18, 2017 4:15 pm

wait a minute.

icedtea,

If you have access to a 401k starting next month, then you could max it out with $18K and that should reduce your income enough to allow a full 2017 Roth Contribution.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Wed Mar 22, 2017 9:35 pm

Alan S. wrote:Do you know enough about your new plan and whether you CAN or WANT TO roll your pre tax TIRA balance into that plan this year? If you do that you could then recharacterize your 2016 Roth excess as a TIRA non deductible TIRA contribution and convert it back to Roth tax free. That would solve the annual MAGI problem because you can always make a non deductible TIRA contribution and then convert it. Effectively that would give you a full Roth contribution and you could do it early in the year so that gains would be Roth gains. That would also eliminate withdrawing excess contributions and earnings that trigger the chicken and egg situation every year. However, your plan may have high expenses or NOT accept IRA rollovers.


I just received info on my 401k plan. I can do pretax or Roth 401k.

Best funds are BlackRock US Debt Index (.32% ER), BlackRock Russell 3000 (.28% ER), and BlackRock Global Equity Ex-US (.38% ER). My TIRA is in VBTLX and VTSAX, at .06% and .05%. Would it make sense to roll my TIRA balance into the 401k? Seems like it wouldn't, considering the ERs. I would need to ask the plan admin if this is possible.

Alan S. wrote:If you eliminate the idea of rolling your present pre tax TIRAs into the plan, then you have the prior two options of either removing the known excess or removing the estimated additional excess after adding in the earnings as taxable income for 2016.


Sorry, I want to be sure I understand this. I know I can remove the excess and gains for 2016, but from what we discussed before that raised problems considering I can't reduce my 2017 Roth contributions. So what would I do exactly?

Alan S. wrote:
Going forward, you could eliminate some of this hassle by no longer contributing early. Let's take 2018 as an example. If you wait and contribute for 2018 in March, 2019 you will know exactly how much of a Roth contribution you can make. You then make that contribution but you no longer have to worry about removing an excess contribution or excise taxes. If income too high to contribute, then invest in taxable. Or if your 401k has a Roth option you could contribute to that instead - up to 18k instead of just 5500 as allowed for a Roth IRA. Again, the expenses and plan investments are a factor. Doing Roth 401 deferrals will increase your MAGI as well, making Roth IRA contributions that much more unlikely.



Definitely good advice, lesson learned.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Wed Mar 22, 2017 9:36 pm

AndrewXnn wrote:wait a minute.

icedtea,

If you have access to a 401k starting next month, then you could max it out with $18K and that should reduce your income enough to allow a full 2017 Roth Contribution.


Even if I contribute 18K, I suspect I won't be able to contribute the full Roth. In 2016 I max'd 401k and still ran into an excess in my Roth. In 2017 my income is slightly higher.

Iced Tea

Alan S.
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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Sun Mar 26, 2017 11:13 pm

If you roll your pre tax IRA dollars into the 401k, it looks like you would be roughly paying about $475 pre tax per year in higher ERs in the 401k.
It's probably worth considering in light of what you could then do:

1) Contribute 5500 as a non deductible TIRA contribution and convert it to Roth tax free (back door Roth).
2) No more concern where your MAGI settles for the year and messing up your direct Roth contributions. This eliminates any 6% annual excise tax and all recharacterization activity.
3) You could also contribute some or all of your 18k to the Roth 401k instead of pre tax because you would no longer need to reduce your MAGI. This may or may not be beneficial based on your current vs retirement tax rates. But it would have no impact on your IRA activity.

If you roll the pre tax balance into your 401k, you could recharacterize both your 2016 and 2017 Roth contribution and then convert 11k to Roth (your 8606 basis amount). You have until the end of the year to complete the IRA to 401k rollover. If you recharacterize these two contributions before the 401k rollover, there will be some pre tax dollars added to your TIRA due to gains on these contributions. Those gains should also be rolled over to the 401k. Therefore, you should do both recharacterization before the 401k rollover, but first verify with your 401k that the plan will accept IRA rollovers. If the plan will only accept rollovers from rollover IRAs (not accounts that received regular contributions), then just roll over the rollover IRAs and do the recharacterizations into NEW IRA accounts so the rollover accounts will still be pure rollovers.

This will avoid removing your 2016 Roth excess with earnings. Instead, you will be recharacterizing that excess to a TIRA. You would file an 8606 with your 2016 return to report your non deductible TIRA contribution. With your 2017 return you would report a 5500 non deductible TIRA contribution and the conversion of the total basis left in your TIRA, which should be non taxable.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sat Apr 08, 2017 10:53 am

Alan S. wrote:If you roll your pre tax IRA dollars into the 401k, it looks like you would be roughly paying about $475 pre tax per year in higher ERs in the 401k.
It's probably worth considering in light of what you could then do:

1) Contribute 5500 as a non deductible TIRA contribution and convert it to Roth tax free (back door Roth).
2) No more concern where your MAGI settles for the year and messing up your direct Roth contributions. This eliminates any 6% annual excise tax and all recharacterization activity.
3) You could also contribute some or all of your 18k to the Roth 401k instead of pre tax because you would no longer need to reduce your MAGI. This may or may not be beneficial based on your current vs retirement tax rates. But it would have no impact on your IRA activity.

If you roll the pre tax balance into your 401k, you could recharacterize both your 2016 and 2017 Roth contribution and then convert 11k to Roth (your 8606 basis amount). You have until the end of the year to complete the IRA to 401k rollover. If you recharacterize these two contributions before the 401k rollover, there will be some pre tax dollars added to your TIRA due to gains on these contributions. Those gains should also be rolled over to the 401k. Therefore, you should do both recharacterization before the 401k rollover, but first verify with your 401k that the plan will accept IRA rollovers. If the plan will only accept rollovers from rollover IRAs (not accounts that received regular contributions), then just roll over the rollover IRAs and do the recharacterizations into NEW IRA accounts so the rollover accounts will still be pure rollovers.

This will avoid removing your 2016 Roth excess with earnings. Instead, you will be recharacterizing that excess to a TIRA. You would file an 8606 with your 2016 return to report your non deductible TIRA contribution. With your 2017 return you would report a 5500 non deductible TIRA contribution and the conversion of the total basis left in your TIRA, which should be non taxable.


Thanks Alan for this detailed response. I meant to reply sooner but some family matters too my attention away. I think I follow everything here, though I'll admit I'm relatively inexperienced with these topics so I had to reread your post a couple times. I tried to find out if my new 401k allows pre tax IRA rollovers into the 401k, but am still waiting to hear back from the provider. I'll post here again as soon as I find out.

A few questions about the approach you outlined here:

- do you mean i should recharacterize both my 2016 excess and my anticipated 2017 excess before doing the IRA-401k rollover? cause I won't know the excess amount for 2017 'till early 2018, right? it's only a guess now
- and if the plan allows it, should i rollover the full IRA balance -- including the recharacterizations - to my 401k?
- and if the plan only allows rollovers from rollover IRAs, then how would I identify what I can rollover, if my IRA then includes my original rollovers from old 401ks, plus earnings/dividends, and the recharacterizations (plus earnings)? I use avg cost basis provided by Vanguard

Beyond these tactical steps, is there some way to estimate the advantage of doing all these steps vs simply withdrawing the 2016 excess via Vanguard, paying the penalty, and doing it again for 2017 excess when I file taxes in early 2018? I feel like the above approach is pretty complex for me, so I don't want to exhaust the energy and risk doing something wrong, unless there seems to be a real advantage.

I'll come back soon about the 401k policy, since I know that dictates everything here.

I have a separate issue with a W-2 that is still getting fixed and probably won't be done before tax deadline so I planned to file an extension. Is that going to be an issue with the way the excess contribution issue is handled?

Thanks,
Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Sat Apr 08, 2017 9:18 pm

icedtea wrote:
Alan S. wrote:If you roll your pre tax IRA dollars into the 401k, it looks like you would be roughly paying about $475 pre tax per year in higher ERs in the 401k.
It's probably worth considering in light of what you could then do:

1) Contribute 5500 as a non deductible TIRA contribution and convert it to Roth tax free (back door Roth).
2) No more concern where your MAGI settles for the year and messing up your direct Roth contributions. This eliminates any 6% annual excise tax and all recharacterization activity.
3) You could also contribute some or all of your 18k to the Roth 401k instead of pre tax because you would no longer need to reduce your MAGI. This may or may not be beneficial based on your current vs retirement tax rates. But it would have no impact on your IRA activity.

If you roll the pre tax balance into your 401k, you could recharacterize both your 2016 and 2017 Roth contribution and then convert 11k to Roth (your 8606 basis amount). You have until the end of the year to complete the IRA to 401k rollover. If you recharacterize these two contributions before the 401k rollover, there will be some pre tax dollars added to your TIRA due to gains on these contributions. Those gains should also be rolled over to the 401k. Therefore, you should do both recharacterization before the 401k rollover, but first verify with your 401k that the plan will accept IRA rollovers. If the plan will only accept rollovers from rollover IRAs (not accounts that received regular contributions), then just roll over the rollover IRAs and do the recharacterizations into NEW IRA accounts so the rollover accounts will still be pure rollovers.

This will avoid removing your 2016 Roth excess with earnings. Instead, you will be recharacterizing that excess to a TIRA. You would file an 8606 with your 2016 return to report your non deductible TIRA contribution. With your 2017 return you would report a 5500 non deductible TIRA contribution and the conversion of the total basis left in your TIRA, which should be non taxable.


Thanks Alan for this detailed response. I meant to reply sooner but some family matters too my attention away. I think I follow everything here, though I'll admit I'm relatively inexperienced with these topics so I had to reread your post a couple times. I tried to find out if my new 401k allows pre tax IRA rollovers into the 401k, but am still waiting to hear back from the provider. I'll post here again as soon as I find out.

A few questions about the approach you outlined here:

- do you mean i should recharacterize both my 2016 excess and my anticipated 2017 excess before doing the IRA-401k rollover? cause I won't know the excess amount for 2017 'till early 2018, right? it's only a guess now

You are correct. Recharacterize the 2016 excess because you know exactly what it is if you have your return prepared, but for 2017 you would recharacterize the entire contribution.
- and if the plan allows it, should i rollover the full IRA balance -- including the recharacterizations - to my 401k?

Roll over the full pre tax balance. Be careful not to roll over any IRA basis from non deductible contributions you would report on Form 8606 through 2017. For 2016 you would have a non deductible contribution of 5500 less the amount you were able to keep as a Roth contribution, and for 2017 you would have a non deductible contribution of 5500 added to your 2016 TIRA basis (line 14 of 2016 8606).

- and if the plan only allows rollovers from rollover IRAs, then how would I identify what I can rollover, if my IRA then includes my original rollovers from old 401ks, plus earnings/dividends, and the recharacterizations (plus earnings)? I use avg cost basis provided by Vanguard

FIrst, find out if your plan accepts ALL TIRA pre tax money. If they limit to only rollover IRAs, recharacterize the Roth contributions into a separate TIRA so you do not wipe out your rollover IRAs with recharacterized contributions. The earnings and dividends are immaterial. Other than these contributions, do you have any other non rollover IRA balance?

Beyond these tactical steps, is there some way to estimate the advantage of doing all these steps vs simply withdrawing the 2016 excess via Vanguard, paying the penalty, and doing it again for 2017 excess when I file taxes in early 2018? I feel like the above approach is pretty complex for me, so I don't want to exhaust the energy and risk doing something wrong, unless there seems to be a real advantage.

No way to tell for sure, but there is only a small advantage unless you can continue to do back door Roth contributions for a few years, perhaps 6 or 7. And that of course is just a guess. If you decide against the IRA rollover, you will have to correct the excess contributions and 2016 has good gains if I remember correctly. Enough gains to further reduce your permitted Roth contribution, so you might end up with a small excise tax in addition.
Entension is a good idea at this point, even if you did not have the W-2 issue. If you decide against the IRA rollover, you would probably switch over to making your contributions for a year only after you have your tax info for that year instead of contributing up front and then having to remove or recharacterize year after year.

I'll come back soon about the 401k policy, since I know that dictates everything here.

I have a separate issue with a W-2 that is still getting fixed and probably won't be done before tax deadline so I planned to file an extension. Is that going to be an issue with the way the excess contribution issue is handled?

Thanks,
Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Tue Apr 11, 2017 8:38 am

Alan S. wrote:
icedtea wrote:FIrst, find out if your plan accepts ALL TIRA pre tax money. If they limit to only rollover IRAs, recharacterize the Roth contributions into a separate TIRA so you do not wipe out your rollover IRAs with recharacterized contributions. The earnings and dividends are immaterial. Other than these contributions, do you have any other non rollover IRA balance?


I got an answer from the 401k provider. They allow rollover from TIRA pretax money to the traditional 401k. They also allow post-tax TIRA to their Roth 401k.

I'll find some time later today to read your last reply. A bit swimming in work right now...

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Earl Lemongrab » Tue Apr 11, 2017 3:36 pm

icedtea wrote:I got an answer from the 401k provider. They allow rollover from TIRA pretax money to the traditional 401k. They also allow post-tax TIRA to their Roth 401k.

That highlighted part can't be. It's against the law to roll post-tax TIRA money into a qualified plan. You also can't roll Roth IRAs into Roth 401(k).
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by retiredjg » Tue Apr 11, 2017 4:37 pm

You can roll Roth 401k into Roth 401k. That is probably what was meant.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Tue Apr 11, 2017 8:24 pm

Earl Lemongrab wrote:
icedtea wrote:I got an answer from the 401k provider. They allow rollover from TIRA pretax money to the traditional 401k. They also allow post-tax TIRA to their Roth 401k.

That highlighted part can't be. It's against the law to roll post-tax TIRA money into a qualified plan. You also can't roll Roth IRAs into Roth 401(k).


Must've been miscommunication. I'm not sure what they meant.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Tue Apr 11, 2017 8:33 pm

Alan S. wrote:
icedtea wrote:Beyond these tactical steps, is there some way to estimate the advantage of doing all these steps vs simply withdrawing the 2016 excess via Vanguard, paying the penalty, and doing it again for 2017 excess when I file taxes in early 2018? I feel like the above approach is pretty complex for me, so I don't want to exhaust the energy and risk doing something wrong, unless there seems to be a real advantage.

No way to tell for sure, but there is only a small advantage unless you can continue to do back door Roth contributions for a few years, perhaps 6 or 7. And that of course is just a guess. If you decide against the IRA rollover, you will have to correct the excess contributions and 2016 has good gains if I remember correctly. Enough gains to further reduce your permitted Roth contribution, so you might end up with a small excise tax in addition.

Extension is a good idea at this point, even if you did not have the W-2 issue. If you decide against the IRA rollover, you would probably switch over to making your contributions for a year only after you have your tax info for that year instead of contributing up front and then having to remove or recharacterize year after year.


Hi Alan,

The 401k provider said I can rollover TIRA pretax to the 401k but we had some miscommunication on whether I could roll over from TIRA the recharacterized Roth excess.

Since the advantage is likely small, I think I'm going to give up on this and just withdraw the Roth excess and gains for 2016.

About the 2017 excess I'm anticipating, would my plan of attack be to wait 'till Q1 2018, find out what the excess is, then withdraw it and the gains?

I understand your tip about waiting till the following year to make any Roth contributions for the previous year, to ensure I don't overcontribute. I'll start following that advice.

Thanks again for putting all the time into this. Even if I don't go through with it, I'm sure others on the forum will read this and learn a lot, too.

Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Tue Apr 11, 2017 10:02 pm

For the 2017 contribution, you might want to withdraw it now with allocated earnings. Earnings will be taxable in 2017, and you will get a 1099R coded 8 next January. If you end up in the phaseout range again this will eliminate the removal from altering your allowed contribution again. Next year you will know exactly what your 2017 contribution will be allowable and you can make that then. It is not a problem to withdraw your 2017 contribution now, then make another one next year before the due date when you know exactly how much you can contribute.

The phaseout range in the worst place to end up if you want to avoid complexity. It is easier to end up with a full contribution or no contribution.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Wed Apr 12, 2017 7:48 am

Alan S. wrote:For the 2017 contribution, you might want to withdraw it now with allocated earnings. Earnings will be taxable in 2017, and you will get a 1099R coded 8 next January. If you end up in the phaseout range again this will eliminate the removal from altering your allowed contribution again. Next year you will know exactly what your 2017 contribution will be allowable and you can make that then. It is not a problem to withdraw your 2017 contribution now, then make another one next year before the due date when you know exactly how much you can contribute.

The phaseout range in the worst place to end up if you want to avoid complexity. It is easier to end up with a full contribution or no contribution.


Good tip, thank you. I'll call Vanguard to see if they are able to identify the earnings on the 2017 contribution alone. I know they said they can do this for the 2016 excess. I guess doing both of these withdrawals now is as good a time as any right? I mean, banking on my funds' share value to decline would be market timing and a fool's game.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by The Wizard » Wed Apr 12, 2017 8:38 am

Looking forward, after you roll your existing tIRA into your 401k, you can always do the backdoor Roth contribution in future working years regardless of whether your MAGI is above, below, or in the middle of the phase-out zone. You don't have to wait till late in the year to see what your variable income plus bonus adds up to.
People other than the OP also should realize this...
Attempted new signature...

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Fri Apr 14, 2017 11:52 am

icedtea wrote:
Alan S. wrote:For the 2017 contribution, you might want to withdraw it now with allocated earnings. Earnings will be taxable in 2017, and you will get a 1099R coded 8 next January. If you end up in the phaseout range again this will eliminate the removal from altering your allowed contribution again. Next year you will know exactly what your 2017 contribution will be allowable and you can make that then. It is not a problem to withdraw your 2017 contribution now, then make another one next year before the due date when you know exactly how much you can contribute.

The phaseout range in the worst place to end up if you want to avoid complexity. It is easier to end up with a full contribution or no contribution.


Good tip, thank you. I'll call Vanguard to see if they are able to identify the earnings on the 2017 contribution alone. I know they said they can do this for the 2016 excess. I guess doing both of these withdrawals now is as good a time as any right? I mean, banking on my funds' share value to decline would be market timing and a fool's game.


OP here asking a follow up. Turns out I definitely have to file an extension since my separate W-2 issue isn't resolved yet.

Should I still withdraw the 2016 Roth excess and earnings before tax deadline? Does it matter?
And before I go ahead and withdraw the 2017 Roth excess and earnings, I wanted to ask--does it matter if I do this now vs early next year? Reason I ask this question again is, there's always a remote possibility I end up not earning as much as I suspect this year (you never know if you might need to take a break from work for personal reasons, or you don't meet the business goals and you get canned).

Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Fri Apr 14, 2017 7:23 pm

If you file an extension you have until 10/16/2017 to remove or recharacterize your 2016 contribution. Realistically, since you must file your return by that date also, the practical deadline for your decision would be in late September. If you do not file the extension OR the return by 4/18, then 4/18 is the deadline to remove or recharacterize as well. As long as you are eligible for the additional 6 months, there is no difference between acting before 4/18 or after 4/18.

For 2017 contributions, the deadline is another year later, Oct, 2018. If you wait until 2018 to remove it and you end up in the phase out range again for 2017, you will be in the same mess as this year.

Sounds like you decided against the pre tax IRA rollover to 401k, but if you reconsider you have until year end to do that. Of course, you have to know for sure if you will do that or not as you would probably not remove the contributions if you were going to do the 401k rollover.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Mon Apr 17, 2017 9:02 pm

Alan S. wrote:If you file an extension you have until 10/16/2017 to remove or recharacterize your 2016 contribution. Realistically, since you must file your return by that date also, the practical deadline for your decision would be in late September. If you do not file the extension OR the return by 4/18, then 4/18 is the deadline to remove or recharacterize as well. As long as you are eligible for the additional 6 months, there is no difference between acting before 4/18 or after 4/18.

For 2017 contributions, the deadline is another year later, Oct, 2018. If you wait until 2018 to remove it and you end up in the phase out range again for 2017, you will be in the same mess as this year.

Sounds like you decided against the pre tax IRA rollover to 401k, but if you reconsider you have until year end to do that. Of course, you have to know for sure if you will do that or not as you would probably not remove the contributions if you were going to do the 401k rollover.


Thanks again Alan. I went ahead and filed the extension, and I'll withdraw the excess and gains from 2016 in the weeks ahead, once I sort out my W-2 issue.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by mirage378 » Mon Apr 17, 2017 11:13 pm

Hi and sorry to hijack icedtea's thread but Alan S has been giving super helpful advice, so i would like to ask a related question.

My mother is 60 years old and in early 2016 mistakenly contributed to a nondeductible IRA for 2015. She meant to contribute to Roth, so she converted the contribution. Unfortunately, she has other IRA balances so the resulting tax liability is quite large. So Vanguard told her her options are to remove the excess or to recharacterize back to traditional IRA. My question is: is she actually still able to remove the excess, if this was a 2015 contribution, which was made and converted in 2016, without paying the 6%? Or is recharacterization the better option? What would you suggest?

Thanks so much!

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sun Jul 23, 2017 9:39 am

OP here. It took ages to fix my W-2 issue, and I'm finally getting around to addressing my 2016 Roth excess. I'm withdrawing the excess and gains with Vanguard. Am I supposed to report the gains and pay tax on them with my 2016 return or 2017 return?

I'd like to go ahead and withdraw the expected excess Roth contribution for 2017 as well. To recap, I anticipate with my AGI that I'll be in excess of at least $3k. I already maxed the 2017 Roth early in the year. Is it recommended I just remove the entire $5500 now or guess and go with less, like $3500? Do I need to have Vanguard calculate the gains and then I pay tax on them with my 2017 return? I would rather address this excess now for the reasons outlined above in this thread.

Thanks,
Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Sat Jul 29, 2017 4:31 pm

icedtea wrote:OP here. It took ages to fix my W-2 issue, and I'm finally getting around to addressing my 2016 Roth excess. I'm withdrawing the excess and gains with Vanguard. Am I supposed to report the gains and pay tax on them with my 2016 return or 2017 return?

I'd like to go ahead and withdraw the expected excess Roth contribution for 2017 as well. To recap, I anticipate with my AGI that I'll be in excess of at least $3k. I already maxed the 2017 Roth early in the year. Is it recommended I just remove the entire $5500 now or guess and go with less, like $3500? Do I need to have Vanguard calculate the gains and then I pay tax on them with my 2017 return? I would rather address this excess now for the reasons outlined above in this thread.

Thanks,
Iced Tea


Hello. For a 2016 excess Roth contribution, any gains returned are taxable in the year IN WHICH you made the excess contribution. If you made the excess contribution in 2016, then the gains are reportable on your 2016 return or amended return. I assume that recharacterizing the excess as a non deductible TIRA contribution has been considered and you do not want to go that route.

Same for any 2017 returned contribution. Since the full contribution has already been made and you expect at least some of it to be excess, there are three options:

1) Recharacterizing as a non deductible TIRA contribution. If you do not have any pre tax TIRA balance you could then convert back to Roth and pay taxes only on the gains generated on your contribution. This could also be postponed and done for only the excess amount in conjunction with 3) below.
2) Withdraw the excess now and the gains will be taxable plus penalty if under 59.5. After your MAGI is known in early 2018, you could then make a new 2017 Roth contribution for the allowed amount.
3) Just leave it be until your MAGI is known in early 2018, then remove the excess portion and leave the allowed amount in. If you have a considerable gain, this is the way to go because you will avoid taxes on the gains for the portion of your contribution that is allowed. There may also be a chance of falling short on MAGI in which case you will not have to do anything.

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by icedtea » Sat Aug 12, 2017 12:03 pm

Alan S. wrote:
Sat Jul 29, 2017 4:31 pm
Hello. For a 2016 excess Roth contribution, any gains returned are taxable in the year IN WHICH you made the excess contribution. If you made the excess contribution in 2016, then the gains are reportable on your 2016 return or amended return. I assume that recharacterizing the excess as a non deductible TIRA contribution has been considered and you do not want to go that route.
Thanks Alan. When Vanguard calculates the gains on the excess contribution, how do I go about inputting that info in my 2016 taxes? Do they issue me a form that I file with the IRS?

And to be clear, will I be liable for any penalty?
Alan S. wrote:
Sat Jul 29, 2017 4:31 pm

Same for any 2017 returned contribution. Since the full contribution has already been made and you expect at least some of it to be excess, there are three options:

1) Recharacterizing as a non deductible TIRA contribution. If you do not have any pre tax TIRA balance you could then convert back to Roth and pay taxes only on the gains generated on your contribution. This could also be postponed and done for only the excess amount in conjunction with 3) below.
2) Withdraw the excess now and the gains will be taxable plus penalty if under 59.5. After your MAGI is known in early 2018, you could then make a new 2017 Roth contribution for the allowed amount.
3) Just leave it be until your MAGI is known in early 2018, then remove the excess portion and leave the allowed amount in. If you have a considerable gain, this is the way to go because you will avoid taxes on the gains for the portion of your contribution that is allowed. There may also be a chance of falling short on MAGI in which case you will not have to do anything.
For 1 above, I have a pretax TIRA balance.
For 2, I thought I could withdraw the excess and wait till early 2018 to decide if I can make a new contribution, and that by doing all this I wouldn't be subject to any penalties. Why would I have to pay a penalty if I handle it this way, and what's the penalty?
For 3, makes sense. Sounds like the best way to handle this. If it turns out the $5500 was all excess, and I remove the $5500 and pay tax on the gains in early 2018, will I be subject to a penalty as well?

Thanks,
Iced Tea

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Re: Recharacterization madness: Roth excess contribution --> TIRA --> Roth

Post by Alan S. » Sat Aug 12, 2017 6:58 pm

If you remove an excess contribution, the IRS issues a 1099R coded in Box 7 to indicate which tax year the earnings shown in Box 2a are taxable and will be reported on line 15b of Form 1040. The 10% penalty applies to the earnings shown in Box 2a. The IRS gets a copy of the 1099R, so you do not send it to the IRS.

For both options 2 and 3, you are removing the contribution, and in the case of option 2 you are removing your contribution before knowing if it is excess or not. They are taxed and reported in the same manner as indicated above.

If you remove your 2017 excess contribution in 2018, there will be no 1099R until 2019, but it will be coded to indicate that the earnings are taxable on your 2017 return. In this case, you should include an explanatory statement with your 2017 return so the IRS knows that you removed the excess contribution. You may want to extend your 2017 return if you have not removed the excess contribution by the time you are ready to file, since you will not know what the earnings will be until the removal is processed, but reporting is easier if you remove the excess as soon as you know what your allowed 2017 contribution is (perhaps by 3/1/2018).

If you use option 3 and there are NO earnings due to market losses, then there is no tax or penalty.

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