Excess IRA contribution converted to Roth

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Topic Author
bbwall
Posts: 24
Joined: Thu Mar 14, 2019 11:50 pm

Excess IRA contribution converted to Roth

Post by bbwall »

Hi all,

My 59yr old mother made a $7K contribution to traditional IRA towards the beginning of last year and then performed a backdoor conversion to move the funds to a Roth IRA*. She stopped working voluntarily from her part-time job due to COVID a few weeks later and her earned income (not including interest/dividends) for the full year stood at $5K. Given, she was not expecting to stop working at the time, the initial contribution made sense but now she has a situation involving excess contribution to the traditional IRA, which has been fully converted to Roth IRA. I understand she will be incurring an annual 6% penalty on the excess $2k contribution unless the situation is addressed before the tax deadline.

What are the realistic options for her at this point? Based on some of the reading I have done, she can withdraw $2K from the Roth account but I wanted to confirm with the folks if that is the right approach or if there are any other recommendations to remedy this situation. FWIW, the IRA accounts are with Vanguard.

Thanks in advance!

* Perhaps this is my limited knowledge on this topic but I didn't fully understand why she had to do a backdoor conversion instead of contributing to Roth directly. Based on her income she qualifies for direct Roth conversion but she said she has been doing this for years based on advice from someone a few years ago. Perhaps this is a topic for another day.
Katietsu
Posts: 4791
Joined: Sun Sep 22, 2013 1:48 am

Re: Excess IRA contribution converted to Roth

Post by Katietsu »

Too bad someone have her advice to use a two step contribute and convert if there was no need for her to do so. A direct excess Roth contribution would have been much easier to correct.

I asked a question last year. The excess contribution was caused by divorce instead of Covid. The contribution was for 2019 not 2020. And the traditional IRA contribution would have be non deductible.

However, I believe the core issue is the same. There was an excess contribution due to not enough earned income. You can not remove an excess contribution from the traditional IRA because it is no longer there. And you can not reverse the Roth conversion as it is not allowed.

Please see the answer by Alan S.


viewtopic.php?f=2&t=304098&p=5026897&hi ... n#p5026897
Topic Author
bbwall
Posts: 24
Joined: Thu Mar 14, 2019 11:50 pm

Re: Excess IRA contribution converted to Roth

Post by bbwall »

Katietsu wrote: Sun May 02, 2021 10:45 pm
I asked a question last year. The excess contribution was caused by divorce instead of Covid. The contribution was for 2019 not 2020. And the traditional IRA contribution would have be non deductible.

However, I believe the core issue is the same. There was an excess contribution due to not enough earned income. You can not remove an excess contribution from the traditional IRA because it is no longer there. And you can not reverse the Roth conversion as it is not allowed.

Please see the answer by Alan S.


viewtopic.php?f=2&t=304098&p=5026897&hi ... n#p5026897
Thank you Katietsu, this is very helpful. If you don't mind sharing feedback on a few items below -
1) how difficult was it for you to get in touch with the custodian (Vanguard in this case) to explain the distribution process, and were they able to act quickly? I am a bit worried if Vanguard will drag their feet on this and things may get delayed ahead of the tax deadline in 2 weeks
2) Would you mind sharing what details did you fill in for form 5329? I have not seen her tax returns (not filed yet) but planning to spend time going through the papers/turbotax next week.
3) Lastly, how did you obtain a dummy 1099R?
Katietsu
Posts: 4791
Joined: Sun Sep 22, 2013 1:48 am

Re: Excess IRA contribution converted to Roth

Post by Katietsu »

bbwall wrote: Mon May 03, 2021 1:27 am
Katietsu wrote: Sun May 02, 2021 10:45 pm
I asked a question last year. The excess contribution was caused by divorce instead of Covid. The contribution was for 2019 not 2020. And the traditional IRA contribution would have be non deductible.

However, I believe the core issue is the same. There was an excess contribution due to not enough earned income. You can not remove an excess contribution from the traditional IRA because it is no longer there. And you can not reverse the Roth conversion as it is not allowed.

Please see the answer by Alan S.


viewtopic.php?f=2&t=304098&p=5026897&hi ... n#p5026897
Thank you Katietsu, this is very helpful. If you don't mind sharing feedback on a few items below -
1) how difficult was it for you to get in touch with the custodian (Vanguard in this case) to explain the distribution process, and were they able to act quickly? I am a bit worried if Vanguard will drag their feet on this and things may get delayed ahead of the tax deadline in 2 weeks
2) Would you mind sharing what details did you fill in for form 5329? I have not seen her tax returns (not filed yet) but planning to spend time going through the papers/turbotax next week.
3) Lastly, how did you obtain a dummy 1099R?
I would suggest filing an extension. You will then have plenty of time to sort this out.

A dummy 1099-R is not something you obtain. It is something you create. The actual 1099-R will be issued in 2022 on a tax year 2021 form with a code in box 7 that indicates that the information belongs on the 2020 tax year. When you speak to Vanguard, see if you can get the EIN number and name and address that will be shown on that 1099-R. You will additionally need the total amount disbursed. With these pieces of information, you can just pretend you received a 1099-R now.
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