Fix excess Roth IRA contribution 2020: using both recharacterization AND timely removing excess before tax filing

Forum|Forum|5 years ago
February 2, 2021
3 replies
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Hi,

I contributed $6000 at the beginning of 2020. However, throughout the year, the extra income I have earned made it no longer eligible for me to contribute anything for 2020. According to the IRS formula, the amount ( initial contribution + income) that I need to remove is greater than $6000.

For example, if the amount I needed to remove from the ROTH IRA to avoid the 6% penalty is $6500, can I first recharactorize $6000 to traditional IRA, then remove the $500 as a distribution and pay the 10% early distribution penalty on the $500?

If that's not possible, is the timely removal of the excess before the tax filing my best option?

Also, regarding the formula to calculate net income (see below), what date should I use for "adjusted closing balance"? should it be 12/31/2020?

Excess contribution * [(adjusted closing balance - adjusted opening balance) / adjusted opening balance ]

Thank you very much!

Not A Product Question

Best answer by DanaB27

You will need to request a recharacterization with your bank by the due date of your return. They will move the contribution and earnings into a traditional IRA. There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. You will receive a 1099-R for the recharacterization.

Please follow these steps to enter your contribution:

Login to your TurboTax Account
Click on the Search box on the top and type “IRA contributions”
Click on “Jump to IRA contributions"
Answer "yes" to "Switch from a Roth To a Traditional IRA?".
The $6,000 of the original Roth contribution must be entered - not any earnings or losses.
Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

DanaB27Answer

Level 15

Please follow these steps to enter your contribution:

Login to your TurboTax Account
Click on the Search box on the top and type “IRA contributions”
Click on “Jump to IRA contributions"
Answer "yes" to "Switch from a Roth To a Traditional IRA?".
The $6,000 of the original Roth contribution must be entered - not any earnings or losses.
Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

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bareliAuthor

Level 2

thank you very much!

dmertz

Level 15

If you are considering recharacterizing, it doesn't seem to make much sense not to just recharacterize the entire excess contribution. If you contributed $6,000, you recharacterize $6,000 and the $6,000 adjusted for any attributable investment gain or loss is transferred to to the traditional IRA. If the gain is $500, you still just recharacterize $6,000 and $6,500 is transferred.

But to answer the question that was asked, yes, you can do a combination of recharacterizing and return of contribution. The order in which you perform these and and how you split the excess between recharacterizing and return of contribution don't matter (except perhaps for slight differences that would result from investment gain or loss incurred between these two transactions, if any).

bareliAuthor

Level 2

Thank you. I misunderstood that the recharacterized amount needs to be equal to or less than the contribution limit ($6000 in this case). I will just recharacterize the whole thing instead of recharacterizing and then doing the distribution.

dmertz

Level 15

Thank for the explanation.

so in my example

contribution to Roth ira 2020: $6000

actual contribution allowed in 2020: $0 (due to the extra income received in the latter part of 2020)

net income from the excess contribution: $500

So I should recharacterize only the contribution of $6000, and transfer $6500 from Roth ira to a traditional ira?

is my understanding correct?

Thank you so much.

Generally the IRA custodian does the net-income-attributable calculation and the IRA custodian needs to do the transfer so that it's reported correctly on Form 1099-R. You should not do it yourself other than doing the calculation yourself to verify that the IRA custodian did the correct calculation.

SLYKTAX

Level 6

I am in the same boat as bareli as extra payout made me not eligible to contribute to my ROTH IRA but both my wife and I have contributed $7000 each at the beginning of the year. I also contributed $7,000 for 2021. Now I need to remove $21,000 from our accounts. I am trying to contact Charles Schwab to initiate withdrawal. What other steps should I do now? Please advise.

DanaB27

Level 15

Yes, you will need to contact to either withdraw the excess contribution plus earnings or to recharacterize the contribution before the due date. Please see What happens if I made a ROTH IRA contribution but my modified adjusted gross income exceeds the limit? for details.

@SLYKTAX

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cjax55

Level 2

I had to recharacterize contributions from Roth to Traditional due to limitations. I followed TurboTax prompts, entering as Roth and providing info from 1099R. I am not seeing TurboTax treat these as deductible contributions to a traditional IRA. Are these recharacterized contributions tax deductible, even if I take the standard deduction? If so, where would they show up? Thank you.