Roth IRA ineligible LOSS

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Topic Author
HumbleJames
Posts: 5
Joined: Sat Jan 12, 2019 3:21 pm

Roth IRA ineligible LOSS

Post by HumbleJames » Sat Jan 12, 2019 3:39 pm

I contributed max $5500 to my 2017 Roth IRA in 2018. I didn’t realize my entire contribution was ineligible due to my salary changes. I just caught it. I believe that means a 12% total penalty.

In addition, and where I’m having trouble, the fund lost $200.

$5300 or so has been moved to my money market settlement fund at Vanguard and my tax professional does not know how to advise me (but they’re working on an answer). The Vanguard associate told me to Transfer another $200 from my money market settlement fund and then withdraw $5500 even to make the withdrawal equal to the contribution. That didn’t sound right to me. What is the appropriate action?

(I performed the Backdoor Roth conversion for 2018, and I’ll use that method going forward)

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Roth IRA ineligible LOSS

Post by mhalley » Sat Jan 12, 2019 4:00 pm

I think vanguard might be wrong, but I am not 100% sure.You would have other options if you caught it in time. You could continue to pay the excess tax, but that doesn’t seem wise.

https://www.thebalance.com/what-to-do-i ... ra-3192888

This thread has answers to a similar ? And includes a link on calculating the amount to withdraw.
https://www.irahelp.com/forum-post/1340 ... n-has-loss
Upon reading the link to the calculation, it says it is not applicable after the deadline. You might ask the question at irahelp.com
Last edited by mhalley on Sat Jan 12, 2019 4:43 pm, edited 1 time in total.

Topic Author
HumbleJames
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Joined: Sat Jan 12, 2019 3:21 pm

Re: Roth IRA ineligible LOSS

Post by HumbleJames » Sat Jan 12, 2019 4:10 pm

The remedy from vanguard rep was to take $200 from my 2018 Roth to make the withdrawal equal the contribution for 2017. Essentially saying “what goes in must come out”, but I don’t see the logic.

I thought I should just take the loss. I asked what would happen if it was the only investment account I had (hypothetically, just a single 2017 IRA and no other to borrow from), and there was no answer.

Then I offered to put $200 from my personal checking account in to make it even, as to not touch my 2018 Roth I had backdoored, and I was referred to my tax professional who didn’t exactly know what to do. Any idea the appropriate action?

Thank you

libralibra
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Re: Roth IRA ineligible LOSS

Post by libralibra » Sat Jan 12, 2019 4:18 pm

How about this: assuming you made both your 2017 roth and 2018 non-deductible tira contributions before 4/15/18 last year, could you somehow just swap the two? I.e. tell vanguard to restate the non-deductible contribution was for 2017 (no penalty is therefore incurred) and the roth contribution was for 2018 (which you still have time to recharacterize w/o penalty as well).

Alan S.
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Location: Prescott, AZ

Re: Roth IRA ineligible LOSS

Post by Alan S. » Sat Jan 12, 2019 4:39 pm

Start with a 2017 5329. You would owe the 6% excise tax on 5500, or on your 12/31/2017 balance if less.

For 2018, you used up your IRA space with a ND TIRA contribution, so the 2018 5329 cannot assign your 2017 Roth excess to 2018, so you are correct that you owe another 6% excise tax on a 2018 5329 on 5500 of excess contributions. I assume since you did a conversion in 2018 that your year end Roth value was at least 5500. File the 2018 5329 with your 2018 return.

Have you done any Roth IRA distributions during this period? And is the mm settlement fund IN your Roth IRA or have you distributed 5300 in 2019 out of your Roth IRA to a taxable MM fund? You DO need to add that additional 200 and withdraw 5500 in total from your Roth IRA in order to eliminate your 5500 excess, so Vanguard was right. This 5500 is deemed to come from your Roth IRA regular contribution basis, even though 200 of it might appear to be coming from your conversion money. You would report the 5500 distribution on your 2019 return on Form 8606. There will be no ordinary tax since the money is coming from your Regular contribution basis of 5500. Then with your 2019 return you also file a final 5329 showing the distribution eliminating the excess amount and there is no further excise tax after 2018.

Had you discovered this last month you could have done the corrective distribution in 2018 and saved $330 on the 2018 excise tax.

Topic Author
HumbleJames
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Joined: Sat Jan 12, 2019 3:21 pm

Re: Roth IRA ineligible LOSS

Post by HumbleJames » Sat Jan 12, 2019 5:01 pm

Alan - extremely helpful. Thanks

The 2017 Roth excess was moved to MM fund in 2019 with plan to withdrawal as non-eligible and pay the 12% total excise tax. That is where it rests today I will take the withdrawal once I decide how to bring the balance up to $5500.

To make up the $200, add the difference from a checking account or move it from the 2018 Roth? Does it matter?

Alan S.
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Location: Prescott, AZ

Re: Roth IRA ineligible LOSS

Post by Alan S. » Sat Jan 12, 2019 5:15 pm

HumbleJames wrote:
Sat Jan 12, 2019 4:10 pm
The remedy from vanguard rep was to take $200 from my 2018 Roth to make the withdrawal equal the contribution for 2017. Essentially saying “what goes in must come out”, but I don’t see the logic.

I thought I should just take the loss. I asked what would happen if it was the only investment account I had (hypothetically, just a single 2017 IRA and no other to borrow from), and there was no answer.

Then I offered to put $200 from my personal checking account in to make it even, as to not touch my 2018 Roth I had backdoored, and I was referred to my tax professional who didn’t exactly know what to do. Any idea the appropriate action?

Thank you
What is confusing you and your tax preparer is that the Roth ordering rules assign what is withdrawn from the account, not what the balance in the account actually came from. So until you withdraw over 5500, it is reported as coming from your regular contribution basis, and if you withdraw any more than that it comes from your conversion. Therefore, the additional 200 is not treated as coming from your conversion money. Do NOT contribute another 200 to your Roth IRA as that will just increase the amount of your excess contributions (unless you are eligible for a regular Roth contribution for 2019 due to your MAGI coming down under the limit).

Topic Author
HumbleJames
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Joined: Sat Jan 12, 2019 3:21 pm

Re: Roth IRA ineligible LOSS

Post by HumbleJames » Sat Jan 12, 2019 5:32 pm

Sorry for the confusion and thank you for your patience. I didn’t mean add $200 to the Roth, rather the MM settlement fund.

$5500 went in, the value when I discovered my error was $5300. $5300 got moved to MM settlement. There is a discrepancy with the in/out. How can I withdrawal $5500 to make It equal when the value is only $5300?

I asked vanguard how they would remedy if I only had one tax year contribution 2017 (no other account to draw from, and there was no answer).

Once I know this answer, I’m all set. Thanks

Topic Author
HumbleJames
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Joined: Sat Jan 12, 2019 3:21 pm

Re: Roth IRA ineligible LOSS

Post by HumbleJames » Sat Jan 12, 2019 5:42 pm

Alan, I did distribute from Roth to taxable MM fund.

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA ineligible LOSS

Post by Alan S. » Sat Jan 12, 2019 5:59 pm

HumbleJames wrote:
Sat Jan 12, 2019 5:32 pm
Sorry for the confusion and thank you for your patience. I didn’t mean add $200 to the Roth, rather the MM settlement fund.

$5500 went in, the value when I discovered my error was $5300. $5300 got moved to MM settlement. There is a discrepancy with the in/out. How can I withdrawal $5500 to make It equal when the value is only $5300?

I asked vanguard how they would remedy if I only had one tax year contribution 2017 (no other account to draw from, and there was no answer).

Once I know this answer, I’m all set. Thanks

So, the settlement fund is NOT in your Roth account? If that is the case, then you already have withdrawn 5300 from the Roth IRA, and you need to withdraw another 200. You will need VG to report a total distribution of 5500 on Form 1099R to eliminate the excess amount.


Since you did a conversion, your Roth should have funds in it to fund an additional distribution of $200. Even if the conversion was done into a different Roth IRA account, you should still withdraw the 200 from that account. You would then get two 1099R forms, 5300 from the first Roth IRA and 200 from the second Roth IRA. Your regular contribution basis floats over all your Roth accounts, it is not locked to the one you contributed to. Therefore whether you have one or two different Roth accounts, you should request another distribution of 200, and that will take care of your excess amount. Again, when you report a distribution of 5500 for 2019, it will show up on Form 8606 as coming from your regular Roth IRA basis of 5500, the amount you contributed.


As to your question, "what if your contribution for 2017 was all you contributed, and you had NO OTHER Roth IRA balance, and the value of your only Roth IRA was now 5300"?

The answer to that is clear from the 5329 Inst for line 20 copied below. You would report on Form 5329 that you withdrew 5500 from your Roth on line 20 of Form 5329 and that would eliminate any more excise taxes. However, you DO have another Roth IRA from your conversion so you need to withdraw 200 from that account. On Form 8606 you would report the actual distribution of 5300 however, as that form is for income taxes, not excise taxes.
Line 20
Generally, enter the amount from Form 8606, line 19, plus any qualified distributions. But if you withdrew the entire balance of all of your Roth IRAs, don’t enter less than the amount on Form 5329, line 18 (see Example next). Example. You contributed $1,000 to a Roth IRA in 2015, your only contribution to Roth IRAs. In 2017, you discovered you weren’t eligible to contribute to a Roth IRA in 2015. On September 8, 2017, you withdrew $800, the entire balance in the Roth IRA. You must file Form 5329 for 2015 and 2016 to pay the additional taxes for those years. When you complete Form 5329 for 2017, you enter $1,000 (not $800) on line 20, because you withdrew the entire balance.

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