Roth IRA Excess Removal and Recharacterization

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gazelle1991
Posts: 58
Joined: Thu Aug 03, 2017 11:20 am

Roth IRA Excess Removal and Recharacterization

Post by gazelle1991 » Wed Sep 05, 2018 10:39 am

Here's my situation: Earlier in the year, I thought my income will be below the limit for Roth IRA contribution so I had contributed about $1K into roth IRA. Later on, I realized my income might be over the limit so I contributed another 4.5K to the traditional IRA on after tax $ basis and do a rollover. Total contribution $5.5K.

I then submitted an excess contribution removal form to Vanguard to remove the $1K ROTH IRA contribution where it seems like I should have done a re characterization from roth IRA to Traditional IRA instead. What should I do now, effectively, I only contributed 4.5K to the traditional IRA for the year but they wouldn't let me contribute the remaining $1K after the excess withdrawal. Should I try to do anything else or sit tight since the tax laws might be complicated/do not allow additional contributions?

Thanks,

FactualFran
Posts: 740
Joined: Sat Feb 21, 2015 2:29 pm

Re: Roth IRA Excess Removal and Recharacterization

Post by FactualFran » Wed Sep 05, 2018 2:26 pm

gazelle1991 wrote:
Wed Sep 05, 2018 10:39 am
I then submitted an excess contribution removal form to Vanguard to remove the $1K ROTH IRA contribution where it seems like I should have done a re characterization from roth IRA to Traditional IRA instead. What should I do now, effectively, I only contributed 4.5K to the traditional IRA for the year but they wouldn't let me contribute the remaining $1K after the excess withdrawal. Should I try to do anything else or sit tight since the tax laws might be complicated/do not allow additional contributions?
The "they wouldn't let me contribute the remaining $1K after the excess withdrawal" part does not sound right. When a contribution is properly withdrawn from an IRA, it is treated as if it had not been made.

I suggest that you ask for a detailed explanation of why they won't let you contribute $1k more to an IRA when, in effect, you have contributed $4.5k to IRAs for the year. Get a quote from an IRS publication.

Alan S.
Posts: 7787
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Excess Removal and Recharacterization

Post by Alan S. » Wed Sep 05, 2018 3:06 pm

Vanguard is dead wrong, UNLESS you somehow just requested a distribution of 1,000 instead of a return/excess contribution return in which you would receive allocated earnings or net of any loss. Check your statement to be sure the distribution shows as an excess return and/or you received more or less than the 1,000 contribution.

If the distribution was not a return of your specific contribution with earnings, then you would be considered to have made your full 5500 contribution and Vanguard would have been correct to limit further contributions.

gazelle1991
Posts: 58
Joined: Thu Aug 03, 2017 11:20 am

Re: Roth IRA Excess Removal and Recharacterization

Post by gazelle1991 » Wed Sep 05, 2018 3:14 pm

FactualFran wrote:
Wed Sep 05, 2018 2:26 pm
gazelle1991 wrote:
Wed Sep 05, 2018 10:39 am
I then submitted an excess contribution removal form to Vanguard to remove the $1K ROTH IRA contribution where it seems like I should have done a re characterization from roth IRA to Traditional IRA instead. What should I do now, effectively, I only contributed 4.5K to the traditional IRA for the year but they wouldn't let me contribute the remaining $1K after the excess withdrawal. Should I try to do anything else or sit tight since the tax laws might be complicated/do not allow additional contributions?
The "they wouldn't let me contribute the remaining $1K after the excess withdrawal" part does not sound right. When a contribution is properly withdrawn from an IRA, it is treated as if it had not been made.

I suggest that you ask for a detailed explanation of why they won't let you contribute $1k more to an IRA when, in effect, you have contributed $4.5k to IRAs for the year. Get a quote from an IRS publication.
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.

Thanks, all.

FactualFran
Posts: 740
Joined: Sat Feb 21, 2015 2:29 pm

Re: Roth IRA Excess Removal and Recharacterization

Post by FactualFran » Thu Sep 06, 2018 2:10 pm

gazelle1991 wrote:
Wed Sep 05, 2018 3:14 pm
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.
Another possibility that you may want to ask Vanguard about: if you had a contribution to a Roth IRA returned (plus its investment return while it was in the Roth IRA) up to at most 60 days ago, then you may make a rollover contribution of that amount to a Roth IRA. You may be able to then recharacterize that amount (plus its investment return after the rollover to a Roth IRA) to a traditional IRA.

I don't know whether Vanguard is willing or able to recharacterize an amount that is a rollover contribution when the rollover amount was from a recharacterizable contribution.

Alan S.
Posts: 7787
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Excess Removal and Recharacterization

Post by Alan S. » Thu Sep 06, 2018 11:08 pm

FactualFran wrote:
Thu Sep 06, 2018 2:10 pm
gazelle1991 wrote:
Wed Sep 05, 2018 3:14 pm
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.
Another possibility that you may want to ask Vanguard about: if you had a contribution to a Roth IRA returned (plus its investment return while it was in the Roth IRA) up to at most 60 days ago, then you may make a rollover contribution of that amount to a Roth IRA. You may be able to then recharacterize that amount (plus its investment return after the rollover to a Roth IRA) to a traditional IRA.

I don't know whether Vanguard is willing or able to recharacterize an amount that is a rollover contribution when the rollover amount was from a recharacterizable contribution.

Fran, this would not work. A corrective distribution is never eligible for rollover, although some custodians would be willing to apply any part of it as a new contribution. This eliminates sending the money to the IRA owner only to have the owner send it back as a new contribution. The custodian would code such a contribution as a new contribution on Form 5498.


Now had the contribution been recharacterized instead of returned, that is also a separate category on Form 5498 and 1099R.

gazelle1991
Posts: 58
Joined: Thu Aug 03, 2017 11:20 am

Re: Roth IRA Excess Removal and Recharacterization

Post by gazelle1991 » Sun Sep 09, 2018 3:48 am

Alan S. wrote:
Thu Sep 06, 2018 11:08 pm
FactualFran wrote:
Thu Sep 06, 2018 2:10 pm
gazelle1991 wrote:
Wed Sep 05, 2018 3:14 pm
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.
Another possibility that you may want to ask Vanguard about: if you had a contribution to a Roth IRA returned (plus its investment return while it was in the Roth IRA) up to at most 60 days ago, then you may make a rollover contribution of that amount to a Roth IRA. You may be able to then recharacterize that amount (plus its investment return after the rollover to a Roth IRA) to a traditional IRA.

I don't know whether Vanguard is willing or able to recharacterize an amount that is a rollover contribution when the rollover amount was from a recharacterizable contribution.

Fran, this would not work. A corrective distribution is never eligible for rollover, although some custodians would be willing to apply any part of it as a new contribution. This eliminates sending the money to the IRA owner only to have the owner send it back as a new contribution. The custodian would code such a contribution as a new contribution on Form 5498.


Now had the contribution been recharacterized instead of returned, that is also a separate category on Form 5498 and 1099R.
Does that mean I accidentally did it right not recharacterizing? Can I still send a check to my Vanguard now given that these are regular contribution into my TIRA?

Alan S.
Posts: 7787
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Excess Removal and Recharacterization

Post by Alan S. » Sun Sep 09, 2018 12:01 pm

gazelle1991 wrote:
Sun Sep 09, 2018 3:48 am
Alan S. wrote:
Thu Sep 06, 2018 11:08 pm
FactualFran wrote:
Thu Sep 06, 2018 2:10 pm
gazelle1991 wrote:
Wed Sep 05, 2018 3:14 pm
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.
Another possibility that you may want to ask Vanguard about: if you had a contribution to a Roth IRA returned (plus its investment return while it was in the Roth IRA) up to at most 60 days ago, then you may make a rollover contribution of that amount to a Roth IRA. You may be able to then recharacterize that amount (plus its investment return after the rollover to a Roth IRA) to a traditional IRA.

I don't know whether Vanguard is willing or able to recharacterize an amount that is a rollover contribution when the rollover amount was from a recharacterizable contribution.

Fran, this would not work. A corrective distribution is never eligible for rollover, although some custodians would be willing to apply any part of it as a new contribution. This eliminates sending the money to the IRA owner only to have the owner send it back as a new contribution. The custodian would code such a contribution as a new contribution on Form 5498.


Now had the contribution been recharacterized instead of returned, that is also a separate category on Form 5498 and 1099R.
Does that mean I accidentally did it right not recharacterizing? Can I still send a check to my Vanguard now given that these are regular contribution into my TIRA?

Usually recharacterization is easier, but if your contribution had a loss then removal and re contribution will save you some money. If your contribution had a gain, then you will owe current tax and penalty on the gain if you remove the contribution, but no current tax if you recharacterize. So it depends. There is no right or wrong, but recharacterization is typically preferable.

You can re contribute the 1,000 to your TIRA to bring your total contributions back up to 5500. (5500-1000+1,000= 5500). Sounds like you will have to send a check as a new contribution due to VGs platform restrictions.


Note that the 5498 forms you receive next year will still show the 1,000 Roth contribution even though you removed it. Custodians do not reflect removals in the 5498, although you will also receive a 1099R coded to show the removal of 1,000 (+/- earnings). The IRS will match up the 5498 with the 1099R, but you should still include an explanatory note with your return regarding the removal of your 1,000 Roth contribution.

gazelle1991
Posts: 58
Joined: Thu Aug 03, 2017 11:20 am

Re: Roth IRA Excess Removal and Recharacterization

Post by gazelle1991 » Tue Sep 11, 2018 2:33 pm

Alan S. wrote:
Sun Sep 09, 2018 12:01 pm
gazelle1991 wrote:
Sun Sep 09, 2018 3:48 am
Alan S. wrote:
Thu Sep 06, 2018 11:08 pm
FactualFran wrote:
Thu Sep 06, 2018 2:10 pm
gazelle1991 wrote:
Wed Sep 05, 2018 3:14 pm
So I called Vanguard to ask about this. They said that their system just doesn't adjust. If I want, I could send them a check for the $1K contribution but on my online account, it will show 5.5K contribution and I cannot do the contribution online.
Another possibility that you may want to ask Vanguard about: if you had a contribution to a Roth IRA returned (plus its investment return while it was in the Roth IRA) up to at most 60 days ago, then you may make a rollover contribution of that amount to a Roth IRA. You may be able to then recharacterize that amount (plus its investment return after the rollover to a Roth IRA) to a traditional IRA.

I don't know whether Vanguard is willing or able to recharacterize an amount that is a rollover contribution when the rollover amount was from a recharacterizable contribution.

Fran, this would not work. A corrective distribution is never eligible for rollover, although some custodians would be willing to apply any part of it as a new contribution. This eliminates sending the money to the IRA owner only to have the owner send it back as a new contribution. The custodian would code such a contribution as a new contribution on Form 5498.


Now had the contribution been recharacterized instead of returned, that is also a separate category on Form 5498 and 1099R.
Does that mean I accidentally did it right not recharacterizing? Can I still send a check to my Vanguard now given that these are regular contribution into my TIRA?

Usually recharacterization is easier, but if your contribution had a loss then removal and re contribution will save you some money. If your contribution had a gain, then you will owe current tax and penalty on the gain if you remove the contribution, but no current tax if you recharacterize. So it depends. There is no right or wrong, but recharacterization is typically preferable.

You can re contribute the 1,000 to your TIRA to bring your total contributions back up to 5500. (5500-1000+1,000= 5500). Sounds like you will have to send a check as a new contribution due to VGs platform restrictions.


Note that the 5498 forms you receive next year will still show the 1,000 Roth contribution even though you removed it. Custodians do not reflect removals in the 5498, although you will also receive a 1099R coded to show the removal of 1,000 (+/- earnings). The IRS will match up the 5498 with the 1099R, but you should still include an explanatory note with your return regarding the removal of your 1,000 Roth contribution.
2 questions:
1) If I were to re-characterize my $1K from Roth to TIRA, can i then backdoor it into Roth again?
2) If I removed the $1K excess contribution from Roth, write a check to contribute the $1K to TIRA, can i then backdoor that $1K into Roth?

Thanks,

FactualFran
Posts: 740
Joined: Sat Feb 21, 2015 2:29 pm

Re: Roth IRA Excess Removal and Recharacterization

Post by FactualFran » Wed Sep 12, 2018 3:02 pm

gazelle1991 wrote:
Tue Sep 11, 2018 2:33 pm
2 questions:
1) If I were to re-characterize my $1K from Roth to TIRA, can i then backdoor it into Roth again?
2) If I removed the $1K excess contribution from Roth, write a check to contribute the $1K to TIRA, can i then backdoor that $1K into Roth?
Money in a traditional IRA can be converted to a Roth IRA. It does not matter whether the money went into the traditional IRA as a contribution or a re-characterization. Converting from a traditional IRA to a Roth IRA does not involve a backdoor.

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