Excess contribution to traditional IRA subsequently converted to Roth IRA - how to fix

[douglas_c]

For the tax year 2022 I made an excess contribution to a traditional IRA and used the entire amount for a backdoor Roth conversion. Now that I'm filling out my taxes I've discovered that the entire initial contribution was an excess contribution, and I'm having trouble determining how to fix it. to be specific these are the steps that I went through:

 08/05/22 - Contributed $7K to Roth IRA account. I had intended to contribute to my traditional IRA, but made selected the wrong account number.

08/11/22 - Immediately realized mistake and asked for it to be reversed but the financial institution didn't get to it for 6 days and therefore could only re-characterize the deposit into my traditional IRA account. The re-characterization of the contribution and earnings from Roth to traditional IRA resulted in a $7093 1099-R with box 7 code "N", and took the total balance of my traditional IRA from $0 to $7093.

11/09/22 - Requested an excess contribution distribution on $93 from the traditional IRA, resulting in a 1099-R for $93 with a box 7 code of 8.

12/22/22 - (Backdoor) converted the $7000 in the traditional IRA to a Roth IRA resulting in a 1099-R with a box 7 code of 2.

Now I'm trying to figure out how to fix the problem. I no longer have any funds in the traditional IRA so I'm assuming that I will need to withdraw the money from the Roth. When I contacted my financial institution they said that they could only do a "normal" distribution (not an excess distribution), but I'm assuming that I need a distribution with a box 7 code of "P" or possibly "PJ". Given this situation, here are my questions:

1) Is the financial institution really limited to doing a normal distribution, and if so is there a way to fill out my taxes so that the "normal" Roth distribution cancels out what is actually an excess contribution to my traditional IRA.

2) Should I have the original $7000 converted contribution removed, or the contribution plus earnings. What about if there's actually been a loss attributed to the conversion (this is the case).

3) How does this (large) mess get filed in TurboTax?  I'm particularly concerned about the method to show the excess 2022 traditional IRA contribution being cancelled with a 2023 1099-R for a normal distribution from a Roth IRA.

Note that I've read the posts I can find about excess contributions to a backdoor Roth (including How to fix an excess traditional IRA contribution that was later converted to a Roth. and Back Door Roth Excee contribution - how to withdraw? but although @macuser_22 and @DanaB27 gave great answers none of the answers seem to cover this particular situation.

[dmertz]

Many errors were made.

08/11/2022:  A return of contribution was a possibility despite the delay, if that was your desire (but a recharacterization was done instead).

11/09/2022:  There was no excess contribution.  The gain-adjusted transfer of $7,093 changed your $7,000 Roth IRA contribution into a $7,000 traditional IRA contribution.  The request of a return of $93 of your $7,000 traditional IRA contribution reduced your traditional IRA contribution to $6,907.  (It seems the IRA custodian should have calculated a $1 investment gain on the $93 and distributed $94 with $1 being taxable, but that's not worth worrying about.)

The way to get this reported properly on your tax return is not obvious.  Enter the $7,000 Roth IRA contribution, indicate that you recharacterized ("switched") $6,907 to be a traditional IRA contribution instead, then when TurboTax indicates that you have $93 excess Roth IRA contribution, indicate that you had $93 returned.  Although this is not the same as what you actually did, it results in correct reporting on your tax return.  You'll explain the recharacterization and return of contribution as I have described them (not as you described them) in the required explanation statements.  Form 8606 line 1 will show the $6,907 nondeductible traditional IRA contribution (assuming that it is indeed nondeductible).

[douglas_c]

Thank you so much for the reply. The information that you have given me will be helpful in getting the re-characterization followed by backdoor conversion filed correctly. I still have my primary question and reading my initial post I see that I didn't make clear the main source of my confusion. My primary issue is that I have a $0 limit for 2022 traditional IRA contributions and the entire initial $7K contribution (originally to Roth-IRA and re-characterized to a traditional IRA) was an excess contribution. I'm glad to here that there wasn't an excess contribution as a result of the re-characterization, but I need to undo the entire $7000 (or $6907) contribution.

The steps I detailed show what I've done (and all the mistakes I've made) so far, but now I'm in the situation of *still* having an ~$7K excess contribution to my traditional IRA (due to the re-characterized Roth contribution) and only being able to withdraw money from the Roth. I need to figure out a way to cancel out the excess contribution or face a 6% penalty every year that this remains unresolved. Given that context, my original three questions are still perplexing me:

1) Is the financial institution really limited to doing a "normal" distribution, and if so is there a way to fill out my taxes so that the "normal" Roth distribution cancels out what is actually an excess contribution to my traditional IRA.

2) Should I have the original $7000 converted contribution removed, or the contribution plus earnings? What about if there's actually been a loss attributed to the conversion (this is the case)?

3) How does this (large) mess get filed in TurboTax?  I'm particularly concerned about the method to show the excess 2022 traditional IRA contribution being cancelled with a 2023 1099-R for a normal distribution from a Roth IRA.

[dmertz]

"My primary issue is that I have a $0 limit for 2022 traditional IRA contributions"

That's different than I had thought.  I had assumed that when you said that you had an excess traditional IRA contribution that you meant the $93 of gains that were transferred to the traditional IRA form the Roth IRA in the recharacterization and I interpreted the part where you said the initial (Roth IRA) contribution was entirely an excess contribution because your MAGI was too high.  The only reason that you would have a $0 traditional IRA contribution limit is if you (nor your spouse if filing jointly)  had any compensation to support a traditional IRA contribution.

If you truly had no supporting compensation, making you ineligible to make an IRA contribution of any kind, yes, you'll need to obtain a return of contribution.  Because funds that were ineligible to be in the traditional IRA were converted to Roth, it's a failed conversion and the deposit into the Roth IRA ended up being a regular contribution that would have to be returned.  Getting the IRA custodian to understand everything and process the return of contribution correctly will be a significant challenge, as will explaining everything to the IRS.  Ultimately you'll have no traditional or Roth IRA contribution for 2022 and you might have some taxable gains to report.

1)  No, the financial institution is not limited to doing a regular distribution, but they need to be made to understand that this was a failed conversion and a return of contribution from the Roth IRA can be made.  If they will only make a regular distribution, you'll have an even bigger challenge reporting everything on your tax return.

2) I think that you'll need to treat the distribution from the traditional IRA that was "converted" to Roth, combined with the $93 distribution as having returned the entire original traditional IRA contribution, then treat the deposit into the Roth IRA as a separate regular contribution of $7,000.  You would then request a return of that $7,000 Roth IRA contribution.

The alternative would be to report the $7,000 excess Roth IRA contribution for 2022, pay the 6$, $420 penalty for 2022, then obtain a regular distribution of exactly $7,000 (or, if eligible, apply the $7,000 toward your 2023 Roth IRA contribution) to eliminate the excess on your 2023 tax return.