I made Traditional IRA & Roth IRA contributions in 2016. I exceeded income limits for that year. Both values become basis carryover as of 12/31/2018. What should I do?

[T12]

Can I leave the contributions at both Traditional IRA and Roth IRA accounts as is or should I take them out from the accounts? Any penalty if I leave them at the accounts as is? I see some other posts mentioned they recharacterized Roth IRA as a nondeductible traditional IRA contribution within a year. Since mine was contributed in 2016, can I still recharacterize both my Traditional IRA contributions and Roth IRA contributions as nondeductible traditional IRA contribution this year? Thanks!

[dmertz · Accepted solution]

If you were covered by a workplace retirement plan and your modified AGI for the purpose of deducting a traditional IRA contribution exceeded the limit, the traditional IRA contribution was a permissible nondeductible contribution and your 2016 tax return should have included Form 8606 to report that.  This became basis that carried over to 2017 and subsequently to 2018.

If your modified AGI for the purpose of making a Roth IRA contribution was above the limit, your Roth IRA contribution was an excess contribution subject to penalty.  Your 2016 and, if the excess could not be applied as a 2017 Roth IRA contribution, your 2017 tax returns should have included Form 5329 calculating the 6% excess contribution penalty for each of these years.  Assuming again that you cannot apply the excess as a 2018 Roth IRA contribution, you own another 6% penalty for 2018.

You are long past the October 15, 2017 deadline for recharacterizing the Roth IRA contribution made for 2016.  If you are unable to apply the excess in the Roth IRA as a 2019 Roth IRA contribution, you must correct the excess by making a regular distribution of the excess from the Roth IRA with no adjustment for earnings.  Because the excess is part of your Roth IRA contribution basis, the distribution will not be subject to tax or penalty on your 2019 tax return.

[T12]

Thanks dmertz for the answer. The traditional IRA contribution was reported on form 8606 as nondeductable IRA. The modified AGI was within the income limit for Roth IRA contribution. So everything is good? I just need to have both traditional IRA basis and Roth IRA basis carryover every year on tax returns until I make a distribution?

[dmertz]

Yes basis carries forward until distributed.  However, I don't understand your latest comment.  What modified AGI was within the income limit for a Roth IRA contribution?  In your question you said that your 2016 MAGI for the purpose was above the limit.  Are you referring to you 2018 MAGI being below the limit, allowing your excess Roth IRA contribution carried in from 2017 to be applied as part or all of your 2018 Roth IRA contribution?

Note that if you apply an excess traditional IRA contribution or, what seems to be in your case, an excess Roth IRA contribution as a contribution for a future year, TurboTax mishandles the basis calculation by failing to reduce your basis by the amount of excess contribution applied while simultaneously increasing the basis by the amount of the resulting nondeductible contribution.

[T12]

Sorry for the confusion. I thought traditional IRA and Roth IRA have the same income limit. Because the traditional IRA contribution was made nondeductable and because both traditional IRA and Roth IRA have basis carryover, I thought the 2016 MAGI for both purposes were above the limit. After doing some researches, I realized that traditional IRA and Roth IRA have different income limits. The Roth IRA limit in 2016 was $117,000 to $132,000. My MAGI was below this range. Is everything ok now? Thanks again for your help dmertz!

[dmertz]

Then you made no excess Roth IRA contribution if you had compensation to support the contribution.  Your basis in nondeductible traditional IRA contributions and basis in Roth IRA contributions continues remains until you make distributions.

[T12]

Thank you!