Fix overcontribution to Roth IRA via recharacterization after filing

[PAccisano]

I made a last-minute contribution to my Roth IRA on April 15 this year after discovering that I was eligible for a match. I had already filed my federal return months prior. Cut to today: I realized I was over the income limit to contribute directly to a Roth IRA (my contribution limit is $0). I'm trying to research how to correct this, but it's pretty confusing to me. If I understand things correctly, I can still contribute to my Roth IRA by first contributing to a Trad IRA, then converting it to Roth, and I can just repeat that process every year.

My question is, is it still possible to do this for the 2023 tax year? In other words, can I:

1. Recharacterize my 2023 Roth contribution as a Trad contribution

2. Convert the Trad IRA to a Roth IRA

3. File some sort of amended return? Is that necessary?

Thanks

[Opus 17]

First, please clarify...how did you get a match on an IRA?  While there is a relatively new option for an employer to enroll their employees in an IRA instead of setting up a 401k, the employer is not allowed to make any contributions, only the employee.

https://www.irs.gov/retirement-plans/plan-sponsor/payroll-deduction-ira

[PAccisano]

My IRA platform, Robinhood, was having a promotion where they contributed a 3% match for new IRA deposits.

[fanfare]

You can do it . refer to Pub590A pg 29.

... take appropriate corrective action within 6 months
from the due date of your return, excluding extensions.
For returns due April , 2024, this period ends
on October , 2024

Make sure to give the custodian the correct instructions.

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recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but are ignored.
You must use a trustee-to-trustee transfer 
You will instruct trustee to calculate the allocable earnings.

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The 3% is a complication.

It remains to be seen if the custodian will consider the 3% as earnings or not. You will find out one way or the other.

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The second step -conversion -, done later, goes on your 2024 tax return.

The second step only works if your Traditional IRA starts at Zero.

you will have to amend 2023 to attach form 8606 showing non-deductible election.

You'll still have to pay tax on the 3% at conversion, if you want a reset situation allowing more backdoor roths.

@PAccisano 

[Opus 17]

@PAccisano 

If you have a balance in any traditional (pre-tax IRA) that consists of deductible (tax-free) funds, then the "back door rollover" won't work the way you expect.  You have to follow the pro-rata rule and all your traditional IRA accounts are considered as one account for the conversion.   If you have pre-tax IRA funds, we can explain this more if needed.

After you complete the recharacterization, you must file an amended 2023 return to report the recharacterization.  Because you already filed, you must file the amended return by mail and write on the top of page 1, “Filed pursuant to section 301.9100-2”.

You also have the option of simply withdrawing the excess contributions.  You must include any earnings attributed to the contribution as taxable income for 2023 (by creating a fake 1099-R, we can help with this).   Again, because you already filed and it is past the April 15 deadline, you must file the amended return by mail and write “Filed pursuant to section 301.9100-2” on page 1. 

[PAccisano]

Thanks for this information. I guess I need to share a few more details, here's the full timeline.

I started with a Tradition IRA in Vangaurd which I had a balance in. On April 15, I opened a new Roth IRA in Robinhood and contributed the max (or what I thought was the max). A few days later, I converted my Vanguard Trad IRA to Roth, then merged it with the Robinhood Roth IRA. Currently, the only IRA I have a balance in is the Robinhood Roth IRA. I also have a 401k separately, but I assume that's irrelevant.

Since I've already converted one IRA for the 2024 tax year, does that mean I can't do it again?

[Opus 17]

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@PAccisano wrote:

Thanks for this information. I guess I need to share a few more details, here's the full timeline.

I started with a Tradition IRA in Vangaurd which I had a balance in. On April 15, I opened a new Roth IRA in Robinhood and contributed the max (or what I thought was the max). A few days later, I converted my Vanguard Trad IRA to Roth, then merged it with the Robinhood Roth IRA. Currently, the only IRA I have a balance in is the Robinhood Roth IRA. I also have a 401k separately, but I assume that's irrelevant.

Since I've already converted one IRA for the 2024 tax year, does that mean I can't do it again?

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Conversions aren't limited to one per year.

At this point you have a Roth IRA that contains (1) a contribution from April 15, 2024 that was retroactive for the 2023 tax year, plus (2) amounts converted from a pre-tax IRA.  Currently you have zero balance in all pre-tax IRAs combined?  

Note that the IRA conversion will be taxable in 2024, conversions are always taxed when they happen, they are not retroactive.  And since Roth conversions are taxable, you must have already been planning to pay the tax on the pre-tax portion of the conversion.  This is helpful information. 

What you will do is ask for a recharacterization of the contribution amount to a traditional IRA.  That will actually happen in May 2024, but you can report it on your 2023 tax return.  You file an amended 2023 tax return to report the Roth contribution. Turbotax will tell you that it was not eligible/excess and will ask you what you will do. You tell the program you will recharacterize it as a traditional IRA contribution. Turbotax should warn you this is non-deductible based on your circumstances, you say ok.  Your amended return will include a copy of form 8606 that documents the basis (non-deductible portion) of your traditional IRA.  File the amended return by mail, not e-filed, and write your note on top.  (Or, you can try e-filing and write "Filed pursuant to section 301.9100-2" as the reason for the amended return.  This is not exactly per IRS instructions but is probably allowable.)

Then in June 2024, convert the traditional IRA to a Roth. If you want to make 2024 backdoor Roth contribution, you can also do that any time, make the non-deductible traditional IRA contribution some time in 2024 and then convert it to the Roth.  You can make more than one conversion in a year.  The key point is to end December 31, 2024 with zero balance in all traditional IRA accounts.  

Then, on your 2024 return, you report all the non-deductible contributions and conversion.  The effect of the pro-rate rule in this case is that you will pay income tax on the pre-tax IRA conversion that you already did (and that you expected to pay tax on) and the conversion of non-deductible contributions from traditional IRA to Roth IRA is non-taxable.

[PAccisano]

Got it! Thanks so much, you rock!