How to fix an excess traditional IRA contribution that was later converted to a Roth.

[personcr]

In 2020 I made an excess non-deductible traditional IRA contribution in the amount of ($2,250), that amount was later converted to a Roth IRA in 2021. My understanding is that this transaction would be considered a failed Roth conversion (aka failed rollover).

My understanding is that failed rollovers are treated as an ordinary distribution from the plan or traditional IRA. For failed Roth rollovers, the distribution part is taxable to the extent of the earnings portion of the distribution. The earnings portion may also be subject to the 10% additional tax on early distributions, unless an exception applies. The contribution part of the failed rollover is subject to the 6% excise tax to the extent it exceeds the statutory limitations on regular contributions to Roth IRAs (i.e., to the extent it is an excess contribution).

I am trying to better understand how to fix this mistake. I understand that I have until 10/15/21 to remove this amount (plus earnings) from the Roth IRA to avoid the 6% penalty.   My 2020 tax filing shows an excess contribution to a traditional IRA  not a Roth IRA and my understanding is that Roth conversions are filed in the year converted (in this case 2021, not 2020). I am unsure whether I need to amend my 2020 tax filing, what forms to file, and what additional amount I owe (as I did not pay taxes on the distribution amount or the 10%  additional tax on early distributions). I'm also unsure how to get my brokerage (Vanguard) to make the right earnings calculation and show a "ordinary distribution."

Please help!

Thank you!

[macuser_22 · Accepted solution]

Your understanding is incorrect.   It was an excess Traditional IRA contribution, not a Roth. (Moving it to a Roth does  not make it a Roth contribution). You had until Oct 15, 2021 to remove it plus earnings form the Traditional IRA.    Since that was not done and is no longer possible, it can only be reported on your 2020 tax return with a 5329 excess not removed and pay the 6% penalty on the excess.    The excess must still be removed as a normal distribution from the Roth since the money was not eligible for conversion.     If not removed by Dec 31, 2021 then you will owe another 6% penalty on the excess Traditional IRA contribution.

(For tax purposes and the penalty, the money was never removed from the Traditional IRA since the conversion was not allowed. But the IRA custodial cannot return money from the Traditional IRA that is not  physically there, all they can do is make a normal (taxable) distribution to you from the account that the money is currently in.)

[personcr]

Thank you this was very helpful!