Excess Roth IRA Contribution

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BakeNeko
Posts: 12
Joined: Wed May 13, 2015 8:18 pm

Excess Roth IRA Contribution

Post by BakeNeko » Sun Mar 11, 2018 11:49 am

Hi BH,
In 2016 my wife and I MAGI reached the Roth IRA phaseout zone. We recharacterized the excess contributions into TIRAs. Our 2017 1099-R lists the Distribution code (box 7) as R-recharacterized IRA contribution made for 2016 and recharacterized in 2017 (re characterization took place before April 18 2017, but still in 2017) .

Do I need to go back to our 2016 return and revise 8606 to match our gross distributions on the 2017 1099-R?

In 2017 we earned enough to fully disqualify us from the Roth IRA which we already contributed to. We plan on recharacterizing our all of our 2017 contributions to a TIRA again. Do I need to file the 8606 in 2017? Turbo tax didn't generate this form this year.


We are aware of the backdoor Roth but have not made the conversion yet.

Thank you in advance.

Alan S.
Posts: 7714
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Excess Roth IRA Contribution

Post by Alan S. » Sun Mar 11, 2018 3:05 pm

BakeNeko wrote:
Sun Mar 11, 2018 11:49 am
Hi BH,
In 2016 my wife and I MAGI reached the Roth IRA phaseout zone. We recharacterized the excess contributions into TIRAs. Our 2017 1099-R lists the Distribution code (box 7) as R-recharacterized IRA contribution made for 2016 and recharacterized in 2017 (re characterization took place before April 18 2017, but still in 2017) .

Do I need to go back to our 2016 return and revise 8606 to match our gross distributions on the 2017 1099-R?

In 2017 we earned enough to fully disqualify us from the Roth IRA which we already contributed to. We plan on recharacterizing our all of our 2017 contributions to a TIRA again. Do I need to file the 8606 in 2017? Turbo tax didn't generate this form this year.


We are aware of the backdoor Roth but have not made the conversion yet.

Thank you in advance.
Your 2016 8606 forms should show the amount of the Roth contribution actually recharacterized for each spouse as non deductible contributions, not the amount that was actually transferred into the TIRA which included earnings.

The amount showing on your 2016 8606 forms line 14 should show on line 2 of your 2017 8606. 5500 should show on line 1 if that is the amount of your Roth contribution being recharacterized.

You will have to tell Turbotax that you recharacterized your 2017 Roth contributions and then you should be able to complete the 8606.

BakeNeko
Posts: 12
Joined: Wed May 13, 2015 8:18 pm

Re: Excess Roth IRA Contribution

Post by BakeNeko » Mon Mar 12, 2018 9:19 pm

Alan S. wrote:
Sun Mar 11, 2018 3:05 pm
BakeNeko wrote:
Sun Mar 11, 2018 11:49 am
Hi BH,
In 2016 my wife and I MAGI reached the Roth IRA phaseout zone. We recharacterized the excess contributions into TIRAs. Our 2017 1099-R lists the Distribution code (box 7) as R-recharacterized IRA contribution made for 2016 and recharacterized in 2017 (re characterization took place before April 18 2017, but still in 2017) .

Do I need to go back to our 2016 return and revise 8606 to match our gross distributions on the 2017 1099-R?

In 2017 we earned enough to fully disqualify us from the Roth IRA which we already contributed to. We plan on recharacterizing our all of our 2017 contributions to a TIRA again. Do I need to file the 8606 in 2017? Turbo tax didn't generate this form this year.


We are aware of the backdoor Roth but have not made the conversion yet.

Thank you in advance.
Your 2016 8606 forms should show the amount of the Roth contribution actually recharacterized for each spouse as non deductible contributions, not the amount that was actually transferred into the TIRA which included earnings.

The amount showing on your 2016 8606 forms line 14 should show on line 2 of your 2017 8606. 5500 should show on line 1 if that is the amount of your Roth contribution being recharacterized.

You will have to tell Turbotax that you recharacterized your 2017 Roth contributions and then you should be able to complete the 8606.
Thanks Alan.

How do I determine the amount of non deductible contributions? Is this the total cost of the mutual funds found on the TIRA statement? This amount is lower than the distributions found on the Roth statement. The earnings would be the difference between the two?

Because the contribution is non deductible, I will only have to pay tax on the earnings, not the entire value of the account?

The amount on my 2016 8606 does not match the cost of the mutual funds or the amount re-characterized transferred. I have to file a 1040x for 2016 and revised 8606s?

Sorry for the newbie questions. Thanks in advance.

Alan S.
Posts: 7714
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Excess Roth IRA Contribution

Post by Alan S. » Mon Mar 12, 2018 10:28 pm

The amount of non deductible contributions is the amount of your Roth contribution that you requested to be recharacterized. If you made a 5500 Roth contribution, and 3000 was allowed, then you would have recharacterized 2500 and 2500 would be reported on line 1,3 and 14 of Form 8606. Do not pay any attention to the amount of earnings or loss that resulted in the amount actually transferred to the TIRA being more or less than 2500 due to earnings calculations. What makes your situation somewhat tricky is that your statements only show actual dollars tranferred, they do not show the amount of your initial contribution that you asked to be recharacterized. Hopefully, you made a note of that at the time you requested the recharacterization.

SInce recharacterization is a transfer and not a distribution to you, there is no immediate tax due for the recharacterization. Note that Box 2a of your 1099R does not show any taxable amount.

In 2017 you will be recharacterizing your entire Roth contribution, so that will be simpler. You would bring forward the line 14 amount from your 2016 8606 to line 2 of the 2017 8606. Add lines 1 and 2 with the total going on line 3. When you then convert the entire balance in your IRA this year, the taxable amount is the amount by which the conversion amount exceeds your total basis on line 3 of the 2017 8606. Therefore, you will only be paying taxes on gains on your contributions, so there is no double tax.

You can file the 2016 8606 forms without a 1040X. One for each spouse. Note that Form 8606 only holds one SSN.
Please advise if you need further clarification.

NOTE: If you used Turbo tax for 2016 and filed without the 8606 which you are now preparing, the 2017 Turbotax will not bring forward any basis, so you will have to override the 2017 basis to reflect the 8606 for 2016 which you are now filing.

BakeNeko
Posts: 12
Joined: Wed May 13, 2015 8:18 pm

Re: Excess Roth IRA Contribution

Post by BakeNeko » Sat Mar 17, 2018 11:20 am

Alan S. wrote:
Mon Mar 12, 2018 10:28 pm
The amount of non deductible contributions is the amount of your Roth contribution that you requested to be recharacterized. If you made a 5500 Roth contribution, and 3000 was allowed, then you would have recharacterized 2500 and 2500 would be reported on line 1,3 and 14 of Form 8606. Do not pay any attention to the amount of earnings or loss that resulted in the amount actually transferred to the TIRA being more or less than 2500 due to earnings calculations. What makes your situation somewhat tricky is that your statements only show actual dollars tranferred, they do not show the amount of your initial contribution that you asked to be recharacterized. Hopefully, you made a note of that at the time you requested the recharacterization.

SInce recharacterization is a transfer and not a distribution to you, there is no immediate tax due for the recharacterization. Note that Box 2a of your 1099R does not show any taxable amount.

In 2017 you will be recharacterizing your entire Roth contribution, so that will be simpler. You would bring forward the line 14 amount from your 2016 8606 to line 2 of the 2017 8606. Add lines 1 and 2 with the total going on line 3. When you then convert the entire balance in your IRA this year, the taxable amount is the amount by which the conversion amount exceeds your total basis on line 3 of the 2017 8606. Therefore, you will only be paying taxes on gains on your contributions, so there is no double tax.

You can file the 2016 8606 forms without a 1040X. One for each spouse. Note that Form 8606 only holds one SSN.
Please advise if you need further clarification.

NOTE: If you used Turbo tax for 2016 and filed without the 8606 which you are now preparing, the 2017 Turbotax will not bring forward any basis, so you will have to override the 2017 basis to reflect the 8606 for 2016 which you are now filing.
Thanks Alan.

I don't know what I requested as a 2016 recharacterization :oops: . Is there a form or statement where I could find this on? Is this something Vanguard could provide?

I already filed the 2016 8606 when I originally filed my taxes but I don't think the recharacterization figures on there are correct. I can refile the 2016 8606 without the 1040x?

Thank you.

Alan S.
Posts: 7714
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Excess Roth IRA Contribution

Post by Alan S. » Sat Mar 17, 2018 12:42 pm

Yes, you can file the 2016 8606 forms without a 1040X.

Potential ways to determine how much of your 2016 Roth contribution was recharacterized to TIRA, and therefore the amount to be shown on the 2016 8606 as non deductible contributions:
1) Any support pages printed with your 2016 return showing the amount of Roth excess. TIRA recharacterized contribution amount would be the amount you contributed to Roth (5500?) less the amount of Roth excess. The amount you originally contributed to Roth would show on Form 5498 for 2016 received in May, 2017. If you do not have support pages, but still have the program you could go back and enter the amount of the original Roth contribution you made and the program should tell you the excess amount that you should have recharacterized.

2) Vanguard could provide the amount recharacterized by checking their records of the recharacterization if need be. Remember, the amount that actually transferred as shown on the 1099R and matching 5498 included earnings allocations, so those amounts will be somewhat more or less than the actual amount recharacterized to TIRA.

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