@jdlloyd1 wrote:
After further reflection on the extra tax added to the joint tax return for my daughter and her husband, it appears that TurboTax has added 6% of the excess contribution for 2021. I am sure this is probably following tax code requirements. What are the ramifications of not recharacterizing the two Roth IRAs for years going forward? Will there be an excess tax added each year? Will there be any other "penalties" added each year? I am planning to file an extension for my daughter's return and then handle the excess contribution before the extended due date. I am presuming if the Roth is recharacterized into a traditional the extra tax paid with the submission will be reversed and she and her husband will need to pay the tax on any gains from the inception of the IRA. She can then decide whether to convert the new Traditional account back into an IRA. I presume if done quickly there might not be any tax consequence other than a need to track a basis in each account that was converted.
The 6% is only added if the excess is NOT removed by the due date of the tax return (Apr 18, 2022) or Oct 15, 2022 if an extension is filed. You must tell TurboTax in the Roth IRA contribution interview that there was an excess and it was removed.
(If all income was entered before the Roth contribution was entered, then TurboTax DOES warn you that there is an excess and it needs to be removed. Further "they" cannot have an IRA, IRA's are individual and the income limit rules are different for each spouse if only one spouse is covered by a retirement plan at work [there might be other reasons]. See this IRS article for Roth contribution limits:
https://www.irs.gov/retirement-plans/roth-iras)
Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.
OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.
If you qualify for a deduction then TurboTax will ask if you want to make it non-deductible. If you do then a 8606 form will be added with the non-deductible amount on line 1.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
