Accidentally contributed to Roth IRA - what to do?

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Trying2learn
Posts: 19
Joined: Sat Apr 08, 2017 4:12 pm

Accidentally contributed to Roth IRA - what to do?

Post by Trying2learn » Tue Mar 13, 2018 9:15 pm

I made a 5500 contribution to my Vanguard ROTH IRA for 2018. I'm now no longer eligible for direct contribution this year. I called Vanguard who sent me an "IRA and ESA Excess Contribution Removal Form" where it asks me where to re-direct the contribution. My goal is to do a backdoor ROTH.

Do I send the 5500 to my (non-Roth) IRA directly and then re-characterize it? Or would it be more simple to send it to my taxable Vanguard account and start the backdoor process from scratch with new 5500? I don't want to do this wrong and lock myself out of any 2018 IRA contributions.

mhalley
Posts: 6305
Joined: Tue Nov 20, 2007 6:02 am

Re: Accidentally contributed to Roth IRA - what to do?

Post by mhalley » Tue Mar 13, 2018 9:32 pm

If you send it to your taxable account you can’t put it back. From the vanguard website:
. How to request a recharacterization
Start by calling us at 800-205-6189—one of our experienced retirement specialists may be able to complete your recharacterization in a single phone call.
If it can't be done over the phone, you'll be instructed to complete and return this form instead:
http://vanguard.com/pdf/s220.pdf

Here is how the finance buff did his:
https://thefinancebuff.com/recharacteri ... guard.html

prairieman
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Re: Accidentally contributed to Roth IRA - what to do?

Post by prairieman » Tue Mar 13, 2018 9:38 pm

I have the same problem. 2017 was my first year without a W2. TurboTax informed me that I can’t contribute more to a Roth than I earned in wages. This won’t help you but maybe it’ll stop someone else from making the same mistake. I am also working with Vanguard to reverse this.

Alan S.
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Location: Prescott, AZ

Re: Accidentally contributed to Roth IRA - what to do?

Post by Alan S. » Tue Mar 13, 2018 11:20 pm

If you don't have any earned income (or spouse doesn't as well), then removal of the excess contribution is needed to avoid a 6% excise tax. Recharacterization won't work because if you transfer to a TIRA, it's still an excess contribution because you don't qualify for a TIRA contribution either.

If you have the contribution returned with allocated earnings by the extended due date for the return , the earnings will be taxable in the year IN WHICH you made the contribution. So if you made the contribution in 2017, then you would normally request the contribution be returned now, so you will have the amount of earnings you need to add to your 2017 return, line 15b.

Yes, there are other secondary options that are normally not beneficial. For example, if your earnings are very high so that the tax on them plus the penalty if under 59.5 is more than the 6%, then pay the 6% on Form 5329 and withdraw the excess amount WITHOUT earnings after 10/15. That stops the excise tax at one year and your earnings stay in the IRA. Or you can apply the excess to the following year if you will be eligible (have earned income) and the excess will be erased on Form 5329. This is the same result as withdrawing the contribution except that you do not have to withdraw it or make a contribution of that amount in the next year. Again, the two options described in this paragraph are not viable very often because the excise tax is usually more than tax on the earnings.

Trying2learn
Posts: 19
Joined: Sat Apr 08, 2017 4:12 pm

Re: Accidentally contributed to Roth IRA - what to do?

Post by Trying2learn » Tue Mar 13, 2018 11:40 pm

Alan S. wrote:
Tue Mar 13, 2018 11:20 pm
If you don't have any earned income (or spouse doesn't as well), then removal of the excess contribution is needed to avoid a 6% excise tax. Recharacterization won't work because if you transfer to a TIRA, it's still an excess contribution because you don't qualify for a TIRA contribution either.

If you have the contribution returned with allocated earnings by the extended due date for the return , the earnings will be taxable in the year IN WHICH you made the contribution. So if you made the contribution in 2017, then you would normally request the contribution be returned now, so you will have the amount of earnings you need to add to your 2017 return, line 15b.

Yes, there are other secondary options that are normally not beneficial. For example, if your earnings are very high so that the tax on them plus the penalty if under 59.5 is more than the 6%, then pay the 6% on Form 5329 and withdraw the excess amount WITHOUT earnings after 10/15. That stops the excise tax at one year and your earnings stay in the IRA. Or you can apply the excess to the following year if you will be eligible (have earned income) and the excess will be erased on Form 5329. This is the same result as withdrawing the contribution except that you do not have to withdraw it or make a contribution of that amount in the next year. Again, the two options described in this paragraph are not viable very often because the excise tax is usually more than tax on the earnings.
Sorry, I should clarify. I don't qualify for direct contributions because I will exceed the income limits this year (modified AGI above limit).

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