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Fanatic
Level 2

Backdoor Roth IRA - What should I do with Excess Contribution

Background

I went through the process of implementing the backdoor Roth IRA for both my wife and myself.   I contributed the max limit to each traditional IRA.  I received a 1099-R for myself showing excess of a dollar (rounded up) and my wife's 1099-R shows an excess of $6.  Now TT is saying "You Currently have a Penalty".  and recommends I remove the excess contribution but the penalty comes out to be 0 in both cases.

 

Question

  1. Should I just enter the max contribution limit into TT?
  2. Should I bother removing the excess contribution?
  3. What is the long term ramification if I don't remove the excess amount?  In other words:
    • Will this particular instance come up every every year when filling out taxes?
    • Will I get hit with some huge penalty when I finally retire and use the money?
  4. I can't imagine this is unique to me/us but assuming this is a problem, how do I avoid it in the future?  Just contribute $10 under the limit?

Thanks for any help!

1 Best answer

Accepted Solutions
macuser_22
Level 15

Backdoor Roth IRA - What should I do with Excess Contribution


@Fanatic wrote:
  1. What is the long term ramification if I don't remove the excess amount?  In other words:
    • Will this particular instance come up every every year when filling out taxes?
    • Will I get hit with some huge penalty when I finally retire and use the money?

 


Yes, you should remove the $6 or it will repeat every year until removed.   Ask for a "return of excess contribution". 

 

If you leave it in and to not convert the $6 to a Roth then it will mess up the backdoor Roth calculations (there will still be money in the Traditional IRA at years end so the non-deductible basis must be prorated.)

 

If you convert all of the Traditional IRA including the $6, then the $6 will be taxable income plus it will continue to be an excess every year until removed.

 

It does not show a penalty now if you choose to leave it in because 6% of $6 is 36 cents that rounds to zero, but I would remove it now (before the July 15 due date) to avoid having to deal with it in the future .

**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.**

View solution in original post

2 Replies
macuser_22
Level 15

Backdoor Roth IRA - What should I do with Excess Contribution


@Fanatic wrote:
  1. What is the long term ramification if I don't remove the excess amount?  In other words:
    • Will this particular instance come up every every year when filling out taxes?
    • Will I get hit with some huge penalty when I finally retire and use the money?

 


Yes, you should remove the $6 or it will repeat every year until removed.   Ask for a "return of excess contribution". 

 

If you leave it in and to not convert the $6 to a Roth then it will mess up the backdoor Roth calculations (there will still be money in the Traditional IRA at years end so the non-deductible basis must be prorated.)

 

If you convert all of the Traditional IRA including the $6, then the $6 will be taxable income plus it will continue to be an excess every year until removed.

 

It does not show a penalty now if you choose to leave it in because 6% of $6 is 36 cents that rounds to zero, but I would remove it now (before the July 15 due date) to avoid having to deal with it in the future .

**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.**
macuser_22
Level 15

Backdoor Roth IRA - What should I do with Excess Contribution


@Fanatic wrote:

I can't imagine this is unique to me/us but assuming this is a problem, how do I avoid it in the future?  Just contribute $10 under the limit?

 


The limit is probably your taxable compensation.  A non-deductible Traditional IRA contribution has no MAGI limit but cannot exceed the amount of your taxable compensation.

 

The maximum IRA contributions for 2019 is $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year which ever is less.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deducible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355


**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.**
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