Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

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mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Fri Apr 14, 2017 10:11 pm

celia wrote:Mask, I will respond in a few hours and am in contact with Alan. We will try to show you your options and the associated "cost" of each choice. Will be back..


Thanks!

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Fri Apr 14, 2017 10:12 pm

Spirit Rider wrote:
mask107 wrote:
celia wrote:3. When you filed your taxes, please clarify what you mean by reporting a Roth contribution of 0. It doesn't make sense that someone who is not contributing to a Roth would even be answering a question about Roth. What question(s) were you answering about Roth?

Like I said, I made an error and reported $0 when I placed $5500 in actually. This is what I meant by filing an amendment. Was wondering whether I should file amendment before deadline since tax was already filed.

celia: Tax software always has you enter the Roth IRA contribution amount to determine if you have an excess contribution or are eligible for the Saver's Credit.

mask107: The entry is for the above purposes. The actual Roth IRA contribution is not actually reported on your return.

Regardless of the corrective action you take, you will have to file an amended return and in both cases, you will have until 10/16 to do this.

1. If you choose to leave the excess contribution in the Roth IRA, you will have to file a 2016 1040X amended return with a Form 5329 by 10/16/2017. This will report the excess contribution and calculate the 6% excise tax ($5,500) * 0.06 = $330. The will be entered on the Form 1040X. Your tax software should be able to generate the 1040X and 5329. If you do not have earned income in 2017, you will have to take a qualified distribution of only the $5,500 contribution amount before 12/31/17. The Roth IRA custodian will report this distribution on a 1099-R by 1/31/2018. You will file a 2017 Form 5329 reporting this tax-free distribution with your 2017 (excise tax free) tax return.

2. If you chose to remove the excess contribution and earnings. You will have to remove the excess contribution and earnings by 10/16/17. You do not report the return of the excess contribution. It will be reported by the Roth IRA custodian by 1/31/2018 as a 2017 return of excess contribution. The earnings on the excess contribution will be reported on a 2016 1040X amended return. It is sometimes hard to know what the exact earnings will be. Given your descriptions, it is probably safe to say that this will increase your 2016 AGI and taxable income by $2,000 - $2,500. Your tax liability will increase by that amount times your marginal tax rate. Your Form 1040X amended return will reflect that.


I still have until 10/17 even though I already filed my taxes? Thanks

Alan S.
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Alan S. » Fri Apr 14, 2017 10:15 pm

First of all, just catching up on this thread that has apparently blown up somewhat due to my recommendation yesterday, I would like to clarify some things:

1) First, thanks to Spiritrider for his tax code documented explanation why the distribution of the excess amount without earnings this year is a totally effective and legitimate method for correcting a Roth excess contribution. It is one of the 4 methods of correcting an excess contribution as explained in this Fairmark article http://fairmark.com/retirement/roth-acc ... roth-iras/ under "Later Withdrawal". Kaye Thomas also recommends this as a specific strategy in his notable book "Go Roth" in the Troubleshooting Chapter. The main benefit is preserving gains in the Roth while still eliminating the excess and avoiding tax and penalty on the earnings if distributed in the usual manner.

2) There are millions of gray areas in the tax code undefined by IRS Regs, RRs, PLRs, Notices or publications. From time to time I may comment on the aggressive side of the gray area in the hope of benefiting the person who came here for help, but this is not one of those times.

3) That said, several recent posts suggest that the OP may have a very small ($80?) TIRA pre tax balance AND/OR may be in the 0 or 10% bracket in 2017. If that turns out to be the case this is a rather unique fact pattern, and the recommendation to remove the excess amount without earnings becomes the second best option here. Recharacterization and reconversion would be the best option under OP's particular unique situation. Recharacterization will avoid the excise tax for 2016, will retain the contribution, and will allow the earnings on the contribution to be converted at a very low rate to the Roth IRA after the 31 day waiting period following recharacterization. If and when OP clarifies the remaining details, he can make the best decision from these two options.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Fri Apr 14, 2017 10:18 pm

Spirit Rider wrote:
mask107 wrote:
celia wrote:3. When you filed your taxes, please clarify what you mean by reporting a Roth contribution of 0. It doesn't make sense that someone who is not contributing to a Roth would even be answering a question about Roth. What question(s) were you answering about Roth?

Like I said, I made an error and reported $0 when I placed $5500 in actually. This is what I meant by filing an amendment. Was wondering whether I should file amendment before deadline since tax was already filed.

celia: Tax software always has you enter the Roth IRA contribution amount to determine if you have an excess contribution or are eligible for the Saver's Credit.

mask107: The entry is for the above purposes. The actual Roth IRA contribution is not actually reported on your return.

Regardless of the corrective action you take, you will have to file an amended return and in both cases, you will have until 10/16 to do this.

1. If you choose to leave the excess contribution in the Roth IRA, you will have to file a 2016 1040X amended return with a Form 5329 by 10/16/2017. This will report the excess contribution and calculate the 6% excise tax ($5,500) * 0.06 = $330.


Wait, I have to pay the 6% excise penalty twice if I withdraw on December 15, 2017? The excess contribution was made in 2016 so I have to pay twice? I thought it was only once since the 2017 tax deadline in April 2018 hasn't passed yet? And it is too late to withdraw the excess without penalty even though the deadline hasn't passed since I filed already?

The will be entered on the Form 1040X. Your tax software should be able to generate the 1040X and 5329. If you do not have earned income in 2017, you will have to take a qualified distribution of only the $5,500 contribution amount before 12/31/17. The Roth IRA custodian will report this distribution on a 1099-R by 1/31/2018. You will file a 2017 Form 5329 reporting this tax-free distribution with your 2017 (excise tax free) tax return.

2. If you chose to remove the excess contribution and earnings. You will have to remove the excess contribution and earnings by 10/16/17.

But I filed my taxes already?

You do not report the return of the excess contribution. It will be reported by the Roth IRA custodian by 1/31/2018 as a 2017 return of excess contribution. The earnings on the excess contribution will be reported on a 2016 1040X amended return. It is sometimes hard to know what the exact earnings will be. Given your descriptions, it is probably safe to say that this will increase your 2016 AGI and taxable income by $2,000 - $2,500. Your tax liability will increase by that amount times your marginal tax rate. Your Form 1040X amended return will reflect that.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Fri Apr 14, 2017 10:22 pm

Alan S. wrote:First of all, just catching up on this thread that has apparently blown up somewhat due to my recommendation yesterday, I would like to clarify some things:

1) First, thanks to Spiritrider for his tax code documented explanation why the distribution of the excess amount without earnings this year is a totally effective and legitimate method for correcting a Roth excess contribution. It is one of the 4 methods of correcting an excess contribution as explained in this Fairmark article http://fairmark.com/retirement/roth-acc ... roth-iras/ under "Later Withdrawal". Kaye Thomas also recommends this as a specific strategy in his notable book "Go Roth" in the Troubleshooting Chapter. The main benefit is preserving gains in the Roth while still eliminating the excess and avoiding tax and penalty on the earnings if distributed in the usual manner.

2) There are millions of gray areas in the tax code undefined by IRS Regs, RRs, PLRs, Notices or publications. From time to time I may comment on the aggressive side of the gray area in the hope of benefiting the person who came here for help, but this is not one of those times.

How come this is not one of those times? Thanks. I am really confused.

3) That said, several recent posts suggest that the OP may have a very small ($80?) TIRA pre tax balance AND/OR may be in the 0 or 10% bracket in 2017. If that turns out to be the case this is a rather unique fact pattern, and the recommendation to remove the excess amount without earnings becomes the second best option here. I can remove the excess without earnings without penalty? Thanks Recharacterization and reconversion would be the best option under OP's particular unique situation. Recharacterization will avoid the excise tax for 2016, will retain the contribution, and will allow the earnings on the contribution to be converted at a very low rate to the Roth IRA after the 31 day waiting period following recharacterization. If and when OP clarifies the remaining details, he can make the best decision from these two options.

I am not sure what to clarify but I do want to clarify any missing details. TIRA is new to me but yes my other IRA account only has $80. I also have to check to see if it is an IRA or 401k. If it is a 401k does the same recharacterization apply? And is it too late to recharacterize if I filed my taxes already? How much time do I have to recharacterize if my taxes have been filed for 2016? Total amount is $50k in roth IRA not sure if this matters or not but I would like to have a Roth again in the future


Spirit Rider
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Spirit Rider » Fri Apr 14, 2017 10:40 pm

mask107 wrote:1. If you choose to leave the excess contribution in the Roth IRA, you will have to file a 2016 1040X amended return with a Form 5329 by 10/16/2017. This will report the excess contribution and calculate the 6% excise tax ($5,500) * 0.06 = $330.

Wait, I have to pay the 6% excise penalty twice if I withdraw on December 15, 2017? The excess contribution was made in 2016 so I have to pay twice? I thought it was only once since the 2017 tax deadline in April 2018 hasn't passed yet? And it is too late to withdraw the excess without penalty even though the deadline hasn't passed since I filed already?

The will be entered on the Form 1040X. Your tax software should be able to generate the 1040X and 5329. If you do not have earned income in 2017, you will have to take a qualified distribution of only the $5,500 contribution amount before 12/31/17. The Roth IRA custodian will report this distribution on a 1099-R by 1/31/2018. You will file a 2017 Form 5329 reporting this tax-free distribution with your 2017 (excise tax free) tax return.

Alan has revised his recommendation in this case on the specific fact pattern. I am answering this to correct the misreading of my response.

Note what I highlighted in red, you will only pay the 6% excise tax once on the 2016 1040X amended return. The 2017 filing is to report the qualified distribution, which cancels the excess contribution carry-forward. This will result in no 2017 excise tax.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Fri Apr 14, 2017 11:06 pm

Spirit Rider wrote:
mask107 wrote:1. If you choose to leave the excess contribution in the Roth IRA, you will have to file a 2016 1040X amended return with a Form 5329 by 10/16/2017. This will report the excess contribution and calculate the 6% excise tax ($5,500) * 0.06 = $330.

Wait, I have to pay the 6% excise penalty twice if I withdraw on December 15, 2017? The excess contribution was made in 2016 so I have to pay twice? I thought it was only once since the 2017 tax deadline in April 2018 hasn't passed yet? And it is too late to withdraw the excess without penalty even though the deadline hasn't passed since I filed already?

The will be entered on the Form 1040X. Your tax software should be able to generate the 1040X and 5329. If you do not have earned income in 2017, you will have to take a qualified distribution of only the $5,500 contribution amount before 12/31/17. The Roth IRA custodian will report this distribution on a 1099-R by 1/31/2018. You will file a 2017 Form 5329 reporting this tax-free distribution with your 2017 (excise tax free) tax return.

Alan has revised his recommendation in this case on the specific fact pattern. I am answering this to correct the misreading of my response.

Note what I highlighted in red, you will only pay the 6% excise tax once on the 2016 1040X amended return. The 2017 filing is to report the qualified distribution, which cancels the excess contribution carry-forward. This will result in no 2017 excise tax.


But I have to do it by 10/2017 and not 12/2017? Is there anything I can do now before 4/18/2017 to help my situation, or is it all the same regardless?

Spirit Rider
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Spirit Rider » Fri Apr 14, 2017 11:57 pm

mask107 wrote:But I have to do it by 10/2017 and not 12/2017? Is there anything I can do now before 4/18/2017 to help my situation, or is it all the same regardless?

You have already filed your 2016 return, so there would be nothing gained by filing your amended return before 4/18/17. In fact, most tax professionals recommend waiting until the return has been fully processed before filing the amended return.

If you choose the option to not remove the excess contribution, you only need to file the amended return by 10/16/17 to pay the excise tax. You have until 12/31 to take the distribution to avoid a 2017 excise tax.

Tanelorn
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Tanelorn » Sat Apr 15, 2017 12:03 am

Alan S. wrote:
Tanelorn wrote:
mask107 wrote:I am considering a career change so I will not be working in 2017. What are my options then? I can just withdraw 5500 as a regular distribution without the earnings (the excess) in 2017 and be fine right? I just don't want to pay 30% tax for 2016 on the withdrawal

if you want to stop the penalties, you eventually have to either take out the excess contributions and their associated earnings (and pay tax on the earnings when you do), or you have to earn enough income to have the right to make the contribution. If you think your tax bracket is very high for 2016 and will be much lower in 2017, that's another reason to consider paying the 6% excess contribution to delay taking out your taxable excess associated earnings until 2017.


Assuming that applying the excess to 2017 is doubtful, the solution is just to remove the contribution (not earnings). This can be done anytime in 2017 as long as the request does not refer to a return of the 2016 contribution. Do not even mention an excess contribution or a 2016 contribution to the custodian, just ask for a distribution of 5500 flat. That will result in a 1099R that is not coded as a return of any specific contribution. But it is safer to wait until after 10/15 since after that date there is no risk of the custodian misinterpreting the request and do the earnings calc. This also allows more time for the contribution to generate tax free earnings.

When this is done, the only tax due with be the 2016 6% excise tax. The gains remain in the Roth, so they do NOT have to be taken out at any time. Conversely, if the contribution is returned with earnings, the earnings must be taxable in the year the contribution was made. If the earnings were 40% of the contribution, it would probably be wise to pay the excise tax for one year even if your tax rate was 0 for the year of the contribution since you are banking 2200 of tax free earnings for $330. That equates to a conversion at a rate of 15% which is usually a winner.

Thank you for the explanation and subsequent clarification, Alan.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Sat Apr 15, 2017 12:03 am

Spirit Rider wrote:
mask107 wrote:But I have to do it by 10/2017 and not 12/2017? Is there anything I can do now before 4/18/2017 to help my situation, or is it all the same regardless?

You have already filed your 2016 return, so there would be nothing gained by filing your amended return before 4/18/17. In fact, most tax professionals recommend waiting until the return has been fully processed before filing the amended return.

If you choose the option to not remove the excess contribution, you only need to file the amended return by 10/16/17 to pay the excise tax. You have until 12/31 to take the distribution to avoid a 2017 excise tax.


Thanks! So does Alan's earnings statement still stand? I can just leave the earnings in there and just withdraw the excess of $5500 and pay the 6% excise penalty even though I won't have earned income in 2017? Or would I save more by doing a recharacterization? And when is the deadline to save the most from a recharacterization if my taxes have been filed already?

Spirit Rider
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Spirit Rider » Sat Apr 15, 2017 1:30 am

mask107 wrote:Thanks! So does Alan's earnings statement still stand? I can just leave the earnings in there and just withdraw the excess of $5500 and pay the 6% excise penalty even though I won't have earned income in 2017? Or would I save more by doing a recharacterization? And when is the deadline to save the most from a recharacterization if my taxes have been filed already?

You need to review item 3) in the 10:15pm response from Alan S. Your response to Alan's request there for more information will help determine what is the best option. Specifically, what will your marginal tax rate be for 2017? What is the total amount of pre-tax assets in all IRAs (traditional, SEP and SIMPLE).

Based on your original post stating a 30% marginal tax rate. Alan suggested that the $330 excise tax from leaving the excess contribution in the Roth IRA might be a better option. Subsequently, you stated that you only had $80 in traditional IRA assets and maybe you would only be in a 10% marginal tax rate in 2017.

If you recharacterize the excess Roth IRA contribution and earnings to a non-deductible traditional IRA contribution and convert to a Roth IRA. This information matters when you convert to the Roth IRA. The amount of the earnings and any other pre-tax IRA assets will be taxed at your marginal tax rate. Based on the new information that may only result in a $200 - $250 tax liability.

The details matter in determining what is the best option. Note: You also have until 10/16/17 to do the recharacterization. There is not really any reason to be in a massive hurry here. Yes, you have already filed your taxes incorrectly and there will be modest additional tax liability likely, but given that it is only around a few hundred, any late payment penalty if any for a month or two will be minimal.

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celia
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby celia » Sat Apr 15, 2017 7:00 am

Mask, After a few general comments, I will attempt to tie this all up with comments from the various posters included. Please consider this a summary to show the possible solutions for anyone with an Excess Roth Contribution and for your case, in particular.

mask107 wrote:Account had 30k prior. After contribution, $35500, rounded down to $35k to make it simplier for calculations. Now is $50000

I apologize for mis-understanding this earlier. I had thought you meant the the $30K was for previous contributions only. Since this was the Roth balance at the time the contribution was made and the account is now worth $50K, this is how the $20K increase in the account value is broken down:
5,500 (2016 contribution)
2247 (gain on the 2016 contribution--since the contribution was 15% of the account at the time it was made [ie, 5,500/35,500 = 15.5%], 15.5% of the 14,500 gain is attributed to the contribution) This is close to what Alan had calculated.
12253 (gain on the pre-existing account balance)
[For those who wonder how gains like this can be achieved, this is possible by owning individual stocks. But big losses are also possible, as OP’s traditional IRA shrank.]

When you take an early distribution from an IRA (before age 59.5), there is a 10% penalty (besides the tax) for the early withdrawal unless an exception applies. The exceptions are listed here:
https://www.irs.gov/taxtopics/tc557.html The one Mask107 might be interested in is if the distribution is used for qualified higher education expenses as described here: https://www.irs.gov/publications/p970/ch09.html
The penalty applies to any part of the distribution that is taxable, such as the gains on the distribution. At the time you request the distribution, you must say it is for qualified education expenses so they can code the 1099-R distribution correctly.

The 6% excise tax applies annually to contributions that weren’t withdrawn, but not their gains.

“Tax Year” refers to the year the contribution was made.



I like the article Alan referenced and it should be read before continuing. I will follow the same order as the options are discussed there but will add more detail.
http://fairmark.com/retirement/roth-acc ... roth-iras/

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Withdrawing excess by due date of return This is the removal of the contribution and gains by the due date of the return.

Action: Ask the custodian to “Remove the Excess Contribution” before October 15 of the year after the contribution was made.
Paperwork: Report the removal and calculate extra costs for the tax year. (The removal would have to be completed before taxes are done.)
Advantage: Easiest method to understand.
Mask107’s Cost: Pay 30% of the taxes on the $2247 gain and a 10% penalty for early withdrawal unless there is an exception (eg, education). There is no 6% penalty since the correction was made in a timely manner.

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Recharacterization This is moving the contributions and their gains to a traditional IRA. If the account owner was eligible to make deductible contributions on his/her tax return, she may deduct them or leave them as non-deductible contributions for the tax year. If the account owner was not eligible to deduct the contribution, she will consider it a non-deductible contribution. This contribution will then be treated as if it had put into the traditional IRA in the first place.

The advantage of a non-deductible contribution is that if the account owner doesn’t have any other non-Roth IRAs or they are small, she can then convert this/these traditional IRA(s) to a Roth while only paying regular taxes on the amounts that are not non-deductible (since this part was previously taxed). In the OP’s case, if the $80 tIRA was converted besides the contribution and its gains, this could maximize the amount of money in the Roth.

Action: Ask the custodian to recharacterize the “Excess Contribution” before October 15 of the year after the contribution was made.
Paperwork: If the IRA contribution is deductible, this needs to be reflected in the tax return that is due for the tax year.
If the IRA contribution is non-deductible, Form 8606 will be attached to the tax return for the tax year to notify the IRS that the traditional IRA contains a “basis” (money that was already taxed) as of the end of the tax year. That will not change the taxes owed or refunded. If the tax return has already been submitted, Form 8606 can be mailed in by itself.
Advantage: Larger Roth balance if a conversion follows the recharacterization
Mask107’s Cost: none for the recharacterization. If a conversion is done, the taxes for the conversion year will be at the account owner’s rate for that tax year based on the amount of the conversion(s) that is not part of the basis.

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Later withdrawal This method allows the contribution to stay in the Roth while the 6% excess contribution penalty applies each year until the contribution (but not the gains) are withdrawn.

Action: none.
Paperwork: On the tax return for the year of the contribution and each year the contribution stays in the Roth, the Excess Roth contribution is acknowledged and taxed. In a future year, it is withdrawn.
Advantage: Earnings can stay in the Roth.
Mask107’s Cost: $300 per year (6% of $5,500)

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Contribute less than max [in a following year] This method allows the contribution to stay in the Roth until a year the account owner is eligible to make a Roth contribution. At that time, the Excess Contribution can be applied to the contribution for that year.

Action: none.
Paperwork: On the tax return for the year of the contribution and each year the contribution stays in the Roth, the Excess Roth contribution is acknowledged and taxed. In a future year, when the account owner is eligible to make a Roth contribution, the Excess contribution is applied to the future year contribution.
Advantage: Earnings can stay in the Roth.
Mask107’s Cost: $300 per year (6% of $5,500)

I welcome comments on this post since I would like to turn it into a wiki article. Please help identify anything that is not clear or is believed to be wrong.

Spirit Rider
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Spirit Rider » Sat Apr 15, 2017 9:35 am

Ceila a small correction: This is a return of excess contribution and earnings only. It can not also be consider as a distribution for another reason (e.g. Education) The only exceptions to the 10% penalty I can think of, is if the 1099-R code could be: Q—Qualified distribution from a Roth IRA. Use Code Q for a distribution from a Roth IRA if you know that the participant meets the 5-year holding period and:
  • The participant has reached age 59 1/2,
  • The participant died, or
  • The participant is disabled
Here is my take on quantifying the choices, ordered from worst to best for the OP's particular circumstances. Assuming $2,250 in earnings and 10% marginal tax rate. Any one else can and will likely differ:
  1. Excess Contribution: Income taxes = $225 ($2,250 * 10%), penalties = $225 ($2,250 * 10%), net cost = $450. Roth IRA assets remaining = $0. Percentage $450 / 0 = Infinitely Bad.
  2. Qualified Distribution: Income taxes = 0, excise tax = $330 ($5,500 * 6%), net cost $330. Roth IRA assets remaining = $2,250. Percentage $330 / $2,250 = 15%% = Good.
  3. Recharacterization: Income taxes = $233 (($2,250 + $80 (IRA) = $2,330 * 10%) * 10%), excise tax = 0, net cost $233. Roth IRA assets remaining = $7,830. Percentage cost $233 / $7,830 = 3% = Better.
  4. 2017 compensation >= $5,550: Income taxes = $0, excise tax = 0, net cost $0. Roth IRA assets remaining = $7,830. Percentage cost $0 / $7,830 = 0% = Best.

Perkunas
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Perkunas » Sat Apr 15, 2017 9:37 am

Are we all 100% certain that the OP's $5,500 roth contribution already has $15,000 of earnings?!

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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Spirit Rider » Sat Apr 15, 2017 10:08 am

Perkunas wrote:Are we all 100% certain that the OP's $5,500 roth contribution already has $15,000 of earnings?!

No, go back and read the third post in the thread.

The OP already had $30,000 in the Roth IRA, added a $5,500 contribution and had $14,500 in gains to $50,000. This was $14,500 / $35,500 * $5,500 = ~= $2,250 in earnings on the contribution. Other than that, forums members have to rely on information provided by the OP.

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celia
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby celia » Sat Apr 15, 2017 1:44 pm

For the wiki article, I think I want to show which method is best for which situation(s). For example:
The Withdrawing excess by due date of return is best for those with little or no gains.
The Recharacterization is best for those for whom Roth conversions are good choices (little or no non-Roth IRAs) and are at the same or better tax rate than usual in the year of conversion.
The Later withdrawal is best for those who missed the Oct 15 deadline for removing Excess Withdrawal then made another contribution in the following year.
The Contribute less than maximum in a following year is best for those who are eligible to make a Roth contribution in the following year, but have not yet made it.

However, the "best" solution for each situation should take into account the amount of the Excess Contribution, amount of the gains attributed to that contribution, the tax rate for each year involved, the "costs" for doing each method, and the account owner's future plans in regards to retirement accounts (Roth conversions, recharacterizations, future contributions, future distributions).

Mask107, Is this helpful to you? Do you know what you want to do yet?


I have a question that I hope someone has knowledgeable of. In calculating the gains on the contribution when the entire year's contribution was not contributed as a lump sum, is the gain calculated on the latest contributions? For example, if $500 was contributed each month for the first 11 months of the year and $1,000 is an Excess Contribution, is the gain calculated off of the default of the two latest contributions or is it considered to be part of each of the 11 contributions? Does the account holder have the option of specifying the months for which he wants the excess contribution to be removed? (I know this would be a messy calculation, but the owner could have contributed to 11 new (empty) Roths and specify which ones to remove, although it would be difficult to invest such small amounts. :D )

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Sat Apr 15, 2017 8:10 pm

celia wrote:For the wiki article, I think I want to show which method is best for which situation(s). For example:
The Withdrawing excess by due date of return is best for those with little or no gains.
The Recharacterization is best for those for whom Roth conversions are good choices (little or no non-Roth IRAs) and are at the same or better tax rate than usual in the year of conversion.
The Later withdrawal is best for those who missed the Oct 15 deadline for removing Excess Withdrawal then made another contribution in the following year.
The Contribute less than maximum in a following year is best for those who are eligible to make a Roth contribution in the following year, but have not yet made it.

However, the "best" solution for each situation should take into account the amount of the Excess Contribution, amount of the gains attributed to that contribution, the tax rate for each year involved, the "costs" for doing each method, and the account owner's future plans in regards to retirement accounts (Roth conversions, recharacterizations, future contributions, future distributions).

Mask107, Is this helpful to you? Do you know what you want to do yet?


I have a question that I hope someone has knowledgeable of. In calculating the gains on the contribution when the entire year's contribution was not contributed as a lump sum, is the gain calculated on the latest contributions? For example, if $500 was contributed each month for the first 11 months of the year and $1,000 is an Excess Contribution, is the gain calculated off of the default of the two latest contributions or is it considered to be part of each of the 11 contributions? Does the account holder have the option of specifying the months for which he wants the excess contribution to be removed? (I know this would be a messy calculation, but the owner could have contributed to 11 new (empty) Roths and specify which ones to remove, although it would be difficult to invest such small amounts. :D )


Thanks. Well should I recharacterize then? There is no rush until october right? My tax bracket for 2017 will be significantly lower than 2016 and I won't have any earned income to contribute to 2017 Roth IRA. What should I do? Thanks

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celia
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby celia » Sun Apr 16, 2017 2:44 am

I agree with others that recharacterization looks like the best choice in your circumstances but I want you to understand why. (Spirit Rider's post at 10:35am showed the lowest cost except for the last method that you aren't eligible for because you don't have wages in 2017. In addition it has the most money ending up in the Roth.) If you make an Excess Contribution again in 10 years maybe another option would be best then.

I didn't go into much detail about the conversion that will follow as that is a separate stand-alone topic that would take the thread off-topic. But know that if your existing traditional IRA was 80K, you would want to choose another option.

It is to your benefit to get this done as soon as possible so that the future growth can happen in the Roth and be-tax free. If you let the growth happen in the traditional, that growth will be an extra amount that is taxed when it is converted.

Your complete actions are:
1. Recharacterize the Excess Contribution and it's gains to a new traditional IRA (wait till after Monday)

2. Fill out Form 8606 and mail it in. It is considered part of the 2016 tax return you already mailed in. (Lines 1, 3, and 14 will be 5,500 in your case.). This tells the IRS that you have non-deductible contributions (basis) of 5,500 in the traditional IRA.
https://www.irs.gov/pub/irs-pdf/f8606.pdf

3. Convert the traditional IRA to Roth.

4. Roll over the $80 to the traditional IRA at Vanguard. Then convert it into the same Roth.
All your non-Roth IRAs must be zero by the end of the year. If you also want to convert part of a 401k (because your taxes will be lower this year), go ahead and rollover part of it to traditional and convert to Roth.

5. After 2017 has become history and you are working on your taxes, the conversion of the non-deductable 5,500 will be tax-free but the rest of the conversions will be taxed.

Remember that the traditional IRA(s) must be empty at the end of the year.

If you have further questions, just ask.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Sun Apr 16, 2017 3:56 am

celia wrote:I agree with others that recharacterization looks like the best choice in your circumstances but I want you to understand why. (Spirit Rider's post at 10:35am showed the lowest cost except for the last method that you aren't eligible for because you don't have wages in 2017. In addition it has the most money ending up in the Roth.) If you make an Excess Contribution again in 10 years maybe another option would be best then.

I didn't go into much detail about the conversion that will follow as that is a separate stand-alone topic that would take the thread off-topic. But know that if your existing traditional IRA was 80K, you would want to choose another option.

It is to your benefit to get this done as soon as possible so that the future growth can happen in the Roth and be-tax free. If you let the growth happen in the traditional, that growth will be an extra amount that is taxed when it is converted.

Your complete actions are:
1. Recharacterize the Excess Contribution and it's gains to a new traditional IRA (wait till after Monday)

2. Fill out Form 8606 and mail it in. It is considered part of the 2016 tax return you already mailed in. (Lines 1, 3, and 14 will be 5,500 in your case.). This tells the IRS that you have non-deductible contributions (basis) of 5,500 in the traditional IRA.
https://www.irs.gov/pub/irs-pdf/f8606.pdf

3. Convert the traditional IRA to Roth.

4. Roll over the $80 to the traditional IRA at Vanguard. Then convert it into the same Roth.
All your non-Roth IRAs must be zero by the end of the year. If you also want to convert part of a 401k (because your taxes will be lower this year), go ahead and rollover part of it to traditional and convert to Roth.

5. After 2017 has become history and you are working on your taxes, the conversion of the non-deductable 5,500 will be tax-free but the rest of the conversions will be taxed.

Remember that the traditional IRA(s) must be empty at the end of the year.

If you have further questions, just ask.


Thanks! This is still way over my head haha. So why should I wait until Monday and not do this on Sunday? Or shall I wait until after Tuesday which is the deadline? Seems like a lot of trouble to save only $300 or so? Or will I be potentially saving more because I do not have to withdraw the excess of $5500?

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Sun Apr 16, 2017 11:23 pm

I just checked and it is a rollover IRA with a total of $80. If I convert my roth IRA by recharacterization, does the whole $50000 turn into a new IRA? And what happens to the $2300 in earnings or so? And there is no rush to do this before the deadline?

And how do I switch this back to a roth IRA??!! Because all the money in my roth had taxes paid on them already. I don't want to pay twice :(

DSInvestor
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby DSInvestor » Mon Apr 17, 2017 12:17 am

mask107 wrote:I just checked and it is a rollover IRA with a total of $80. If I convert my roth IRA by recharacterization, does the whole $50000 turn into a new IRA? And what happens to the $2300 in earnings or so? And there is no rush to do this before the deadline?

And how do I switch this back to a roth IRA??!! Because all the money in my roth had taxes paid on them already. I don't want to pay twice :(



The recharacterization of your $5500 Roth IRA contribution will make it as though you contributed that $5500 to Traditional IRA all along. Any growth since your contribution will be as though they happened in the Traditional IRA. The recharacterization will shift your $5500 contribution for 2016, and will NOT touch the contributions made in prior years. Once the recharacterization of your 2016 contribution is complete, you convert the assets in your Traditional IRA to Roth IRA. The tax treatment for the conversion back to Roth IRA will depend on whether or not you're able to take the Traditional IRA deduction for 2016.

Let's say your $5500 Roth IRA contribution grew to 8K.

If you were not covered by employer plan for 2016, you'll be able to deduct your full $5500 Traditional IRA deduction. In this case, your Traditional IRA will be purely pretax. When you convert the $8K back to Roth IRA, 8K is taxable for 2017 because you converted in calendar 2017. This may not be a big deal given that you'll have little or no income for 2017 - Remember that the standard deduction and 1 exemption gives you $10,400 of ordinary income tax free. Plus you got a tax deduction while you're in 30% bracket for 2016.

If you were covered by employer plan for 2016, your $5500 Traditional IRA contribution will be non-deductible. This means you will have a 8K Traditional IRA with 5.5K IRA basis. When you convert 8K to Roth IRA, $5500 is non-taxable and 2500 is taxable.

Remember that you will have little or no income for 2017 so even if the conversion is taxable, it may result in little or no tax.

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Mon Apr 17, 2017 1:43 am

DSInvestor wrote:
mask107 wrote:I just checked and it is a rollover IRA with a total of $80. If I convert my roth IRA by recharacterization, does the whole $50000 turn into a new IRA? And what happens to the $2300 in earnings or so? And there is no rush to do this before the deadline?

And how do I switch this back to a roth IRA??!! Because all the money in my roth had taxes paid on them already. I don't want to pay twice :(



The recharacterization of your $5500 Roth IRA contribution will make it as though you contributed that $5500 to Traditional IRA all along. Any growth since your contribution will be as though they happened in the Traditional IRA. The recharacterization will shift your $5500 contribution for 2016, and will NOT touch the contributions made in prior years. Once the recharacterization of your 2016 contribution is complete, you convert the assets in your Traditional IRA to Roth IRA. The tax treatment for the conversion back to Roth IRA will depend on whether or not you're able to take the Traditional IRA deduction for 2016.

Let's say your $5500 Roth IRA contribution grew to 8K.

If you were not covered by employer plan for 2016, you'll be able to deduct your full $5500 Traditional IRA deduction. In this case, your Traditional IRA will be purely pretax. When you convert the $8K back to Roth IRA, 8K is taxable for 2017 because you converted in calendar 2017. This may not be a big deal given that you'll have little or no income for 2017 - Remember that the standard deduction and 1 exemption gives you $10,400 of ordinary income tax free. Plus you got a tax deduction while you're in 30% bracket for 2016.

If you were covered by employer plan for 2016, your $5500 Traditional IRA contribution will be non-deductible. This means you will have a 8K Traditional IRA with 5.5K IRA basis. When you convert 8K to Roth IRA, $5500 is non-taxable and 2500 is taxable.

Remember that you will have little or no income for 2017 so even if the conversion is taxable, it may result in little or no tax.



Thank you so much. I will do a recharacterization. I did not have an employer covered plan for 2016. I already paid my taxes already so when I make an amendment for a recharacterization, I should get back a refund right? When is the deadline for the recharacterization if I made my roth contribution in 2016?

DSInvestor
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby DSInvestor » Mon Apr 17, 2017 11:20 am

mask107 wrote:Thank you so much. I will do a recharacterization. I did not have an employer covered plan for 2016. I already paid my taxes already so when I make an amendment for a recharacterization, I should get back a refund right? When is the deadline for the recharacterization if I made my roth contribution in 2016?


Deadline to re characterize 2016 IRA contributions is 2016 tax filing deadline plus extensions (APRIL 18, 2017 or OCT 15, 2017 if you file an extension). Since you've already filed your 2016 tax return, I'm not sure where you stand regarding an extension. I'd get moving on the recharacterization of the 2016 contribution today. Vanguard is probably slammed today with people trying to get their IRA contributions in. You may need to create a Traditional IRA account online first. Then look for the recharacterization forms on vanguard.com. Here's a link to a Vanguard page where you can get the forms - Scroll down to section on "How to initiate a recharacterization"
https://investor.vanguard.com/ira/roth- ... terization

I think you'd be fine if your mail-in recharacterization form is date stamped for APRIl 18, 2017 or earlier.

Once the recharacterization is complete, do a roth conversion of everything in the Traditional IRA to Roth IRA. You can convert back into your existing Roth IRA.

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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby celia » Mon Apr 17, 2017 7:27 pm

Mask, None of the options we are discussing here need to be done this week, so take your time in understanding this. Please re-read the second page of this thread and the links on it.

It appears that most of us forgot that possibly your recharacterization might be considered deductible for 2016. Thanks to DSInvestor for pointing this out. Check to see if you are eligible by not having ACCESS to an employer plan in 2016 (check your W-2 statments for last year to see that box 13 'Retirement plan' is not checked). It doesn't matter if you participated or not. What matters is if the employer HAD a plan you were eligible to use. If you weren't eligible for an employer plan, you can deduct the traditional IRA contribution on your 2016 taxes after you recharacterize. Your taxes should decrease by 30% of that amount. Then you should convert the contribution back to the Roth and pay only the 2017 tax rate on that amount. The gains on that contribution would be taxable the same whether or not the contribution is deductible.

But first I think you should understand Roth conversions and recharacterization which are outside the scope of this thread. I am trying to keep us focused on your options now that we all agree on them. So please read https://www.bogleheads.org/wiki/Roth_IRA_conversion to learn about Roth conversions and https://www.bogleheads.org/wiki/IRA_recharacterization to learn about recharacterizations. These pages are written more simply than we can describe here. Also try things out in your tax software using a copy of your tax data file.

I have gone through the second page of this thread thoroughly and made a table for you with more accurate numbers. Spirit Rider and I had small math errors earlier. Your exact tax numbers will vary since we are working with rounded numbers.

Image

This is well worth your time to understand as you can potentially save $1,000+ dollars among the various options. Even though you could wait until early October to recharacterize, I suggest you do it as soon as you understand and are comfortable with the concepts. You have to do the recharacterization transaction before you file your taxes. And then the sooner you convert and get everything back in the Roth, the more the future growth can continue tax-free (instead of growing further in the traditional IRA and paying increased taxes on the conversion).


I also strongly suggest you convert your small $80 traditional IRA this year no matter what option you choose, for several reasons:
1. The calulation of the "conversion" part of the taxes takes the Dec. 31, 2017 value of all of your traditional IRAs into account. It is a messy calculation that the software will do for you, but the remaining un-converted IRAs will be considered to have some basis (non-deductible amount) left in them. This will continue until all your traditional IRAs are converted.

2. When you go back to work and if you have the same high income, you should make non-deductible traditional contributions (instead of Roth) to avoid the complications you are now experiencing. Each year you make non-deductible contributions, you should convert soon after. If you still have another traditional IRA sitting around, this will impact your messy calculations again.

3. Your tax rate is low this year.

4. It will only cost you $8 if you are in the 10% tax bracket this year or $12 if in the 15% bracket!

Do it after you recharacterize and convert the 2016 contribution to keep the transactions separate. You can either do it at the custodian that currently holds the account, or transfer it to the empty traditional IRA after the recharacterization-conversion is complete, then convert the $80 IRA.

You can also do an on-line search for terms you aren't quite sure of or read more in our wiki. The more you know overall, the better an investor (and taxpayer) you will be.

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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby Epsilon Delta » Wed Apr 19, 2017 11:21 am

Alan S. wrote:3) That said, several recent posts suggest that the OP may have a very small ($80?) TIRA pre tax balance AND/OR may be in the 0 or 10% bracket in 2017. If that turns out to be the case this is a rather unique fact pattern, and the recommendation to remove the excess amount without earnings becomes the second best option here. Recharacterization and reconversion would be the best option under OP's particular unique situation. Recharacterization will avoid the excise tax for 2016, will retain the contribution, and will allow the earnings on the contribution to be converted at a very low rate to the Roth IRA after the 31 day waiting period following recharacterization. If and when OP clarifies the remaining details, he can make the best decision from these two options.


A low (possibly zero) marginal rate in 2017 makes the recharacterization and reconversion preferable to paying the excise tax and leaving the earnings in the Roth.

As Alan said it is a fairly rare fact pattern. I posit that a low marginal rate is even rarer than that. Phaseouts on things like ACA subsidies (If they continue to exist for 2017), Earned Income Tax Credit, Savers Credit and AGI base benefits outside of the tax code (e.g. HEAP, some scholarships) mean that in many cases people with incomes that are nominally in the low brackets face a marginal rate that is much higher than the nominal 0%/10%/15%. There are also cases when the marginal rate is less than zero and you want extra income.

From the record we can't say for certain none of these apply to the OP. It is also possible that he has other uses for a year or more of low taxes, such as capital gains harvesting or rolling a 401(k) to an IRA and converting to a Roth.

Since there is no urgency at this point (post April 18) the OP has time to look at the entirety of his situation before taking action.
OTOH since we're talking about a few thousand of income the cost of getting it non-optimal will not be that high in the context of a lifetime of professional earnings.
OTOOH it's nice to eke out that extra $100 and put one over on the man. :twisted:

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Wed Apr 19, 2017 7:10 pm

Epsilon Delta wrote:
Alan S. wrote:3) That said, several recent posts suggest that the OP may have a very small ($80?) TIRA pre tax balance AND/OR may be in the 0 or 10% bracket in 2017. If that turns out to be the case this is a rather unique fact pattern, and the recommendation to remove the excess amount without earnings becomes the second best option here. Recharacterization and reconversion would be the best option under OP's particular unique situation. Recharacterization will avoid the excise tax for 2016, will retain the contribution, and will allow the earnings on the contribution to be converted at a very low rate to the Roth IRA after the 31 day waiting period following recharacterization. If and when OP clarifies the remaining details, he can make the best decision from these two options.


A low (possibly zero) marginal rate in 2017 makes the recharacterization and reconversion preferable to paying the excise tax and leaving the earnings in the Roth.

As Alan said it is a fairly rare fact pattern. I posit that a low marginal rate is even rarer than that. Phaseouts on things like ACA subsidies (If they continue to exist for 2017), Earned Income Tax Credit, Savers Credit and AGI base benefits outside of the tax code (e.g. HEAP, some scholarships) mean that in many cases people with incomes that are nominally in the low brackets face a marginal rate that is much higher than the nominal 0%/10%/15%. There are also cases when the marginal rate is less than zero and you want extra income.

From the record we can't say for certain none of these apply to the OP. It is also possible that he has other uses for a year or more of low taxes, such as capital gains harvesting or rolling a 401(k) to an IRA and converting to a Roth.

Since there is no urgency at this point (post April 18) the OP has time to look at the entirety of his situation before taking action.
OTOH since we're talking about a few thousand of income the cost of getting it non-optimal will not be that high in the context of a lifetime of professional earnings.
OTOOH it's nice to eke out that extra $100 and put one over on the man. :twisted:



Just want to say thanks to everyone here especially Celia. The thing is, I didn't recharacterize yet and it is past the deadline now. I have a couple of questions (7 in total) :

1) Can I still recharacterize since I filed my taxes already and didn't file an extension for my 2016 excess roth ira contribution and that it is already past the deadline?
2) Since it is past the deadline, the 2016 contribution will be shown to go into the roth already to the irs?
3) I have a separate rollover IRA of $80. Am I supposed to recharacterize into the rollover IRA or a brand new traditional IRA?
4) Is it too late for the contribution to be shown to the traditional ira for 2016?
5) The confusing part is that I will be trying to get a refund with the traditonal ira for 2016 and then the irs will get a form saying that I contributed to the roth in 2016 since taxes have already been filed. Can I really recharacterize from a roth to traditional back to a roth all in the span of a month?
6) How long do I have to wait before going back from a traditional to a roth?
7) Won't that all be for the 2017 tax year then and not 2016 which results in me not being able to get a refund from converting to a traditional ira since it will be applied for 2017 instead of 2016?

I think what I am looking for is a step by step process on how to convert roth ira to traditional ira even though I have a rollover ira of $80 ( or would I transfer it directly to my rollover ira and ignore the new traditional ira?), then convert that other ira back to a roth and have a result where the end result is that I can deduct the excess contribution that has been switched over to the other ira for the 2016 taxes, yet pay 2017 taxes on the earnings of the excess contribution and have the other ira converted back to a roth for 2017 so I can deduct the initial excess contribution for 2016 taxes. Sorry if I made it confusing.

Thanks

mask107
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby mask107 » Thu Apr 20, 2017 9:09 pm

bump please

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celia
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Re: Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings?

Postby celia » Fri Apr 21, 2017 6:08 pm

mask107 wrote:1) Can I still recharacterize since I filed my taxes already and didn't file an extension for my 2016 excess roth ira contribution and that it is already past the deadline?
Yes, you can still recharacterize until Oct. 15, 2017. You didn't need an extension of time to file since you already filed.

2) Since it is past the deadline, the 2016 contribution will be shown to go into the roth already to the irs?
The IRS doesn't get notified of 2016 contributions until May. You can still recharacterize and convert. Since you are doing it past the April filing deadline, it is ok, as long as you do it before October 15, 2017. Don't worry about the notice that the IRS will get in May as you and the IRS will get 1099s next January to confirm that the recharacterization was done before October 15, 2017.

3) I have a separate rollover IRA of $80. Am I supposed to recharacterize into the rollover IRA or a brand new traditional IRA?
Do everything at the custodian who currently holds the Roth IRA. Recharacterize from the Roth into a new traditional IRA at the custodian the Roth is at. Then convert that tIRA back to the same Roth. Then if the $80 IRA is at a different custodian, transfer the $80 rollover IRA to the new (now empty) tIRA. From there you can convert into the Roth.

4) Is it too late for the contribution to be shown to the traditional ira for 2016?
No, You can still recharacterize the 2016 Roth contribution to a new traditional IRA.

5) The confusing part is that I will be trying to get a refund with the traditonal ira for 2016 and then the irs will get a form saying that I contributed to the roth in 2016 since taxes have already been filed. Can I really recharacterize from a roth to traditional back to a roth all in the span of a month?
The IRS is still working on receiving incoming returns. Don't worry about their workload. You need to report the
2016 contribution somehow since you never told then about it, as far as I understand. The recharacterization from Roth to traditional will take one day. The following day, you can convert it back to Roth. So no problem.


6) How long do I have to wait before going back from a traditional to a roth?
One day.

7) Won't that all be for the 2017 tax year then and not 2016 which results in me not being able to get a refund from converting to a traditional ira since it will be applied for 2017 instead of 2016?
The recharacterization will be for the 2016 tax year and needs to be reflected on an amended return as it impacts your 2016 taxes.
The conversion back to Roth and the conversion of the $80 will both be reported as 2017 transactions that will be on your 2017 return.
The recharacterization will also be reported on your 2017 return for information only [not impacting the taxes for this year]. It acknowledges the 1099-R form you will receive in January that confirms to the IRS that you did the recharacterization in 2017. The "code" for the recharacterization will indicate it is fixing up a 2016 contribution.



I think what I am looking for is a step by step process on how to convert roth ira to traditional ira even though I have a rollover ira of $80 ...

This is the order you will do everything:
1. Understand what is about to happen and why. Be sure you didn't have access to an employer retirement plan, even if you chose to not use it by looking at your 2016 W-2. [you are doing this now]
2. Recharacterize the 2016 $5,500 contribution and its gains to a new traditional IRA by calling the custodian (Vanguard?) that holds your Roth.
Say "I want to recharacterize my 2016 $5,500 Roth contribution to a new traditional IRA." They will ask you for the account number and notify you that the gains will also transfer. Say "OK".
3. Amend your 2016 tax return to report that you made a deductible traditional IRA contribution in 2016. Since it will decrease your taxable income by $5,500, you will get some money back. Write "Filed pursuant to section 301.9100-2" on your amended return. Amended returns usually have to be sent in on paper since they already have one return for you that they are processing. If your state also has state tax returns and they allow a deduction for contributions to traditional IRAs, amend the state return too.

Meanwhile, while you are working on the tax return:
4. After one day, convert the entire traditional IRA back to the Roth. (this will be a 2017 transaction)
5. Wait a week or two for things to settle down.
6. Move the $80 traditional IRA to your new traditional IRA (optional, you CAN keep it where it is at the same custodian, but you may not be able to invest such a small amount in the future, so it might as well go in your bigger Roth).
7. Convert the $80 traditional IRA to the same or different Roth. (this will be a 2017 transaction)
8. Next year, file taxes that confirm you did all the transactions in 2017. The recharacterization will be for information only as you are confirming the correct tax forms were received, but the conversions will cause a small tax to be calculated.

-----------------------------------------------------
Since I have given you lots of the little details, it may seem overwhelming for now. After googling and reading about IRA recharacterizations and Roth conversions, if you are still confused, I suggest you just forget about this. Instead, just withdraw $5,500 between October 18 and December 31 this year and pay the $330 tax as Alan originally suggested (that I didn't understand at the time). That is the simplest of all solutions, but not the cheapest. Just be sure that this is taken care of this year. If the money is still in the Roth come next January 1, you will owe an additional $330 penalty for a second year.

P. S. Don't forget to check your Private Messages again.


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