My daughter got married in October 2021 and she and her husband invested in Roth IRAs in 2021

[jdlloyd47]

I have been doing my daughter's taxes for years.  I am not a tax expert but I thought I knew enough to help her out.  Until things got complicated, that is.  She got married last October (2021) to a person who makes an almost equivalent salary ($100K each).  With their salaries and investments, their joint MAGI is around $222K.  He put $7K in his Roth and she put $6K in her Roth last year.  I put all the information into TT and there was not any red flags raised.  However, I did notice that there was an extra tax of $780 on line 23, Sched 1040 (from Schedule 2, line 21).  After trying to understand "why," I think it is connected with the two Roth IRA investments.  When I researched the eligibility for them to invest in Roth IRAs, I find the MAGI simply makes the Roth investments disallowed (with their combined salary they are now ineligible to use Roth IRAs.)  Why was this situation not flagged by TT?  Why is there this extra tax?  Should the IRAs be recharacterized into non-deductible traditional IRAs immediately?  What is the proper way to proceed with the IRA situation?  I suggested she obtain some real tax advice to actually prepare her 2021 taxes but at this juncture, it is too late to find anyone until after April 18.  How should I advise her to proceed in the next two weeks and get a delay in submitting her taxes so a tax expert can complete her 2021 taxes?

[ee-ea]

File an extension   https://ttlc.intuit.com/community/credits-and-deductions/help/what-is-the-2-rule/00/26650

[hbl3973]

jdlloyd47,

Good news.  IRS publication 590-A  ( https://www.irs.gov/pub/irs-pdf/p590a.pdf  )  gives them two options for what to do to undo the Roth contributions.  They can either withdraw all the contributions or recharacterize them.  For the former on page 42 it says:

"Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that
is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

If you timely filed your 2021 tax return without withdrawing a contribution that you made in 2021, you can still
have the contribution returned to you within 6 months of the due date of your 2021 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return."

For the latter, I refer you to the discussion on pages 28-30 for the details on how to convert them to nondeductible traditional IRA contributions.  Be forewarned that they will need to keep track of their IRA bases from now on via Form 8606.  (My wife and I have done that for about 3 decades.)

[jdlloyd47]

I think this will be the right approach to take while regrouping with a professional tax review.  Thanks.

[jdlloyd47]

You are making me feel more relieved with this response.  There appears to be a way forward here.  I don't relish having to track bases but that might be the least of the complexities if this error is not corrected.  Thank you

[jdlloyd1]

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.

[macuser_22]

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@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.

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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.

[jdlloyd47]

Thanks for your explanation of why my TT did not flag the excess contributions.  I did enter IRA contributions before all the incomes were entered. I believe I followed everything you said except for "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].  " 

My understanding is that the MAGI for a married filing jointly applies equally to both as far as the limits for establishing an Individual  Roth IRA (both have roughly equal salaries and equal unearned income) and that the MAGI (>$208,000) limits their access  individually to a Roth IRA they can each fund a traditional IRA up to the maximum (depending on age) although the traditional IRA might not (in their case will not) lessen the current year taxes owed.  They are (each is) not barred from investing in an individual retirement account ( traditional IRA) iust because the MAGI exceeds the limit of $125000 for the joint return.  Am I understanding it? 

[macuser_22]

Yes the MAGI applies to both.   I was referring to a Traditional IRA not a Roth.

[fanfare]

@jdlloyd47 

If you file form 4868 you have until Oct 15 to take the action, whichever action you decide.

the solution would be to have the custodian reverse the contribution + earnings.

The custodian can do this before April 18th and tell you what the earnings are so you can report it and file by April 18th.