Fixing Excess Roth IRA Contribution

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Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Fixing Excess Roth IRA Contribution

Post by Tatupu »

Hello Fellow Bogleheads,

I'm hoping you can set me straight as I try to fix an error that I made. Apologies for the lengthy message.

In February 2019, I contributed $6000 to a Roth IRA for myself and $7000 (catchup contribution) to a Roth IRA for my spouse. At some point in 2019 I realized that we would be over the income limits and thus not eligible to contribute to our Roth IRAs.

In order to fix the issue, in December 2019 I recharacterized my $6000 Roth IRA contribution to a TIRA (nondeductible). Then in December 2019 I did a Backdoor Roth. I converted the $6000 plus about $700 in earnings from the TIRA into my Roth.

If I understand correctly, on my 2019 tax return I will report the $6000 recharacterization on Form 8606. The $700 in earnings will be taxed as ordinary income on my 2019 tax return. Before filing taxes, I want to make sure my understanding is correct.

Do I have this right or am I missing something?

Now to the $7000 2019 Roth contribution for my spouse. We were delayed in opening up a TIRA for my spouse and thus we did not recharacterize that $7000 Roth contribution to a TIRA until January 2020. We then executed a Backdoor Roth and converted the $7000 plus about $700 in earnings from the TIRA into the Roth.

In my spouse's case, if I understand correctly, we will report the $7000 recharacterization on our 2019 tax return using Form 8606. But since we didn't convert the TIRA to Roth until January 2020, we would report and pay taxes on the $700 in earnings on our 2020 tax return since that transaction took place in January 2020.

Is that right?

Thanks all for your assistance. This is the first year we were over the income limit and it's been a bit confusing navigating a fix. For 2020, I didn't make the same mistake and instead just did a regular backdoor Roth from the start.

Thanks,
Tatupu
Alan S.
Posts: 10175
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Fixing Excess Roth IRA Contribution

Post by Alan S. »

Just semantics, but you report the non deductible TIRA contribution of 6000 on your Form 8606 along with the conversion. As for the recharacterization itself, the gross amount showing on your recharacterization 1099R should show up on line 4a of Form 1040 along with the gross conversion amount. If you are using a tax program be alert for a question regarding recharacterized contributions. Note that the IRS wants you to make an explanatory statement with your return regarding the recharacterized contribution, but because you and the IRS will get the 1099R right away, if you cannot figure out how to make the statement and still e file, you should be OK by omitting the statement. But make an effort to include the statement.

But because your spouse recharacterized in 2020, the reporting process is much different. There will be no recharacterization 1099R until Jan, 2021 coded R to apply to a 2019 contribution. For this situation, the explanatory statement mentioned above is much more critical since the IRS will not be aware that your spouse corrected the excess Roth contribution for another year. The fact that you will report a 7000 non deductible contribution on spouse's 2019 8606 is not enough for the IRS to figure out what happened. You are correct that spouse's 2020 conversion will be reported on Form 8606 on your 2020 return. The 2019 return only reports the non deductible contribution and the explanatory statement for the recharacterization.

Since your did the non deductible contribution and conversion already for 2020, your 2020 8606 forms will both report non deductible contributions and the conversions in spouse's case will be the total of the two conversions done in 2020 (unless they were combined into a single conversion). So your 2020 8606 forms will continue to be somewhat different. Otherwise, from 2021 on things will be easier since there will not be any more recharacterization to request or report.
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Re: Fixing Excess Roth IRA Contribution

Post by Tatupu »

Alan S.,

Thanks so much for your extremely helpful response. It's much appreciated.

Tatupu
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