Roth IRA - excess contribution

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Topic Author
ChiliH20
Posts: 21
Joined: Mon Aug 10, 2015 2:35 pm

Roth IRA - excess contribution

Post by ChiliH20 » Mon Feb 11, 2019 5:47 pm

Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.

megabad
Posts: 2476
Joined: Fri Jun 01, 2018 4:00 pm

Re: Roth IRA - excess contribution

Post by megabad » Mon Feb 11, 2019 6:20 pm

ChiliH20 wrote:
Mon Feb 11, 2019 5:47 pm
Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.
Here is what I would do (prior to all tax deadlines) based on the limited info provided:
1) Roll your all your tIRAs (ie. Rollover IRA and all other) into your (or spouses) 401k --this will clear the path for backdoor Roth
2) Recharacterize your excess contribution to nondeductible tIRA prior to tax deadlines
3) Convert this contribution to Roth IRA

If the gain is small or negative. You could alternatively just withdraw the excess and pay the taxes and penalty on that small amount. Problem is, if your income stays this high, you will need to get rid of the tIRAs anyway to do backdoor Roth IRAs in the future, so I would prefer the steps above rather than withdrawal.

Any major custodian will perform these steps for you (ie. they would do the calculations in most cases). You would just fill out a form.

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Duckie
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Location: California Bay Area

Re: Roth IRA - excess contribution

Post by Duckie » Mon Feb 11, 2019 7:23 pm

ChiliH20 wrote:I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified.
Contact your Roth IRA custodian and have them "recharacterize" your 2018 contribution plus earnings to a TIRA. When you file your 2018 taxes you tell your accountant / tax software you made a $1000 contribution to a Roth IRA, recharacterized $1000 to a TIRA (ignoring the earnings here), and that the TIRA contribution was non-deductible. That information will trigger both Form 8606 and the recharacterization statement (the earnings are noted on the statement). If you want you can still contribute the extra $4500 to the TIRA for 2018 before filing your taxes.
Also have company 401K if that works better.
Will your 401k take incoming rollovers? If it does (and has decent options) you can roll your Rollover IRA into the 401k. That will make the Backdoor Roth method practical. If you don't get rid of that Rollover IRA the backdoor method will be too costly because of the dreaded pro-rata rule.
Do I still have to pay a penalty to reclassify?
There is no penalty for recharacterizing.
I have to transfer any gains or dividends too, right?
Yes.
How do I calculate that?
The custodian figures that.

Topic Author
ChiliH20
Posts: 21
Joined: Mon Aug 10, 2015 2:35 pm

Re: Roth IRA - excess contribution

Post by ChiliH20 » Thu Feb 14, 2019 11:57 am

Thanks! This is all very helpful.

Might be stupid question, but I can recharacterize my Roth contribution to traditional IRA even if I am contributing to my work 401K, right? What if I maxed out my 401K contribution?

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Duckie
Posts: 6867
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Roth IRA - excess contribution

Post by Duckie » Thu Feb 14, 2019 3:39 pm

ChiliH20 wrote:I can recharacterize my Roth contribution to traditional IRA even if I am contributing to my work 401K, right? What if I maxed out my 401K contribution?
Yes and yes. Recharacterizations (and contributions and conversions) of your personal IRAs are not affected by what is happening in your employer plan.

gmc4h232
Posts: 348
Joined: Wed Jan 27, 2016 8:11 am

Re: Roth IRA - excess contribution

Post by gmc4h232 » Thu Feb 14, 2019 3:51 pm

megabad wrote:
Mon Feb 11, 2019 6:20 pm
ChiliH20 wrote:
Mon Feb 11, 2019 5:47 pm
Sat down to work on my taxes this weekend and realized I can no longer contribute to my Roth since my AGI is over 200k (married filling jointly). I knew we were getting close so I had only contributed $1,000 for 2018, but didn't think we would be over. Believe my options are to reclassify the contribution or take a distribution and pay a penalty. Are there any good threads that discuss this topic? I have a rollover IRA at TD Ameritrade were the Roth is at so I think it should be easy to have the contribution reclassified. Also have company 401K if that works better. Anyone have experience with that? Do I still have to pay a penalty to reclassify? I have to transfer any gains or dividends too, right? How do I calculate that? Please let me know if you need any more details. Thanks for any feedback and help.
Here is what I would do (prior to all tax deadlines) based on the limited info provided:
1) Roll your all your tIRAs (ie. Rollover IRA and all other) into your (or spouses) 401k --this will clear the path for backdoor Roth
2) Recharacterize your excess contribution to nondeductible tIRA prior to tax deadlines
3) Convert this contribution to Roth IRA

If the gain is small or negative. You could alternatively just withdraw the excess and pay the taxes and penalty on that small amount. Problem is, if your income stays this high, you will need to get rid of the tIRAs anyway to do backdoor Roth IRAs in the future, so I would prefer the steps above rather than withdrawal.

Any major custodian will perform these steps for you (ie. they would do the calculations in most cases). You would just fill out a form.
Consider opening solo 401k for the TIRAs if you can qualify for one to save on fees.

Topic Author
ChiliH20
Posts: 21
Joined: Mon Aug 10, 2015 2:35 pm

Re: Roth IRA - excess contribution

Post by ChiliH20 » Thu Feb 14, 2019 5:32 pm

"Consider opening solo 401k for the TIRAs if you can qualify for one to save on fees." - I don't know how to do the quote thing


another dumb question. How can I tell how much TD Ameritrade is charging me for my traditional IRAs. I have two traditional IRAs with them. One for me when I moved jobs, and another was opened for my wife when she moved jobs. We have one Roth IRA that is also with TD. Can I consolidate the two traditional IRAs to one, or do they have to be separate since we are two different people? We both have 401K at our current jobs. Would it be better to move the TD Ameritrade funds to our employer 401K?

Topic Author
ChiliH20
Posts: 21
Joined: Mon Aug 10, 2015 2:35 pm

Re: Roth IRA - excess contribution

Post by ChiliH20 » Tue Feb 19, 2019 10:57 am

Another follow up on this. Want to make sure I am understanding everything correctly. I made four $250 deposits to my ROTH in early 2018 thinking I would still be eligible. Once I realized I would be close to hitting income limit I stopped the contributions. The $1,000 in deposits was used to purchase additional shares in my ROTH. Do I sell shares to have cash to cover the excess contribution before contacting TD Ameritrade? I know TD will calculate any earnings and loss and can recharacterize the contribution, but I wasn't clear on if I needed to have cash in the account prior to the recharacterization. Is one way cleaner than the other? Will I need to submit four requests for removal of excess to correspond with the number of excess contributions?

It's only a $1,000 so I want to keep this as simple as possible. I'm not going to lose sleep over any small amount of tax savings or tax penalty so the easiest fix to get this corrected is all I want. Will recharacterizing be the simplest or would it just be easier to withdraw the excess and any earnings and pay the penalty? I'm 36, married, 2 kids, with a decent retirement portfolio ($400k) and no debt other than mortgage. I don't like thinking about taxes and just want this over and done. If I recharacterize would there be ongoing tax issues I have to deal with next year? I do my taxes myself with turbotax.

Sorry for all these questions. Would also appreciate any links to helpful threads or articles. Love would I have learned here by keeping my portfolio simple and want to apply that to fixing this issue. Thanks!

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Duckie
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Location: California Bay Area

Re: Roth IRA - excess contribution

Post by Duckie » Tue Feb 19, 2019 5:24 pm

ChiliH20 wrote:Can I consolidate the two traditional IRAs to one, or do they have to be separate since we are two different people?
If one is his and one is hers they CANNOT be combined. The "I" in IRA is "individual".
We both have 401K at our current jobs. Would it be better to move the TD Ameritrade funds to our employer 401K?
If the 401k will allow it and if the options are decent, yes. Moving the pre-tax IRA assets into your 401k plans will open the way for the backdoor Roth method.
Do I sell shares to have cash to cover the excess contribution before contacting TD Ameritrade?
No.
I know TD will calculate any earnings and loss and can recharacterize the contribution, but I wasn't clear on if I needed to have cash in the account prior to the recharacterization. Is one way cleaner than the other?
The shares that are currently in your Roth IRA will be moved to your Traditional IRA. Don't sell.
Will I need to submit four requests for removal of excess to correspond with the number of excess contributions?
No. You tell the custodian to recharacterize the $1000 plus earnings. They'll do it in one fell swoop.
Will recharacterizing be the simplest or would it just be easier to withdraw the excess and any earnings and pay the penalty?
Recharacterizing is the easiest and the cheapest way.
If I recharacterize would there be ongoing tax issues I have to deal with next year? I do my taxes myself with turbotax.
Whether you recharacterize or withdraw you're going to have some reporting to do next tax season.

Alan S.
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Location: Prescott, AZ

Re: Roth IRA - excess contribution

Post by Alan S. » Tue Feb 19, 2019 10:55 pm

Two more points.

Since you are recharacterizing your Roth contribution to TIRA, you are then treated as having made a TIRA contribution which will be either deductible or non deductible. In your case due to participating in a 401k and at your joint income level, you cannot deduct the TIRA contribution. Therefore, you must file a Form 8606 with your 2018 return to report a non deductible contribution of 1,000. Show 1,000 on the 8606 regardless of the amount that actually transfers to the TIRA account, which will be more or less than 1000 depending on gains or losses. Show just your SSN on the 8606.

Attach an explanatory statement with your 2018 return in the following format:

In 2018 I contributed 1,000 to my Roth IRA, and on xx/xx/2019 I recharacterized the entire contribution to my traditional IRA. The contribution was worth $y when transferred to the traditional IRA." TurboTax and most tax programs allow you to include this statement, but there are some programs that will not. If your program does not provide for statements, then file without the statement, but there is a chance the IRS will inquire about the Roth contribution late this year. You will get a 1099R reporting the recharacterization, but not until Jan, 2020, and the 1099R will be coded to show it was for a 2018 contribution. If you do not provide a statement, the IRS will figure this out for themselves a year from now when they get their copy of the 1099R.

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