After already filing my 2016 taxes last year, I retroactively contributed 5,500 to my Roth IRA for year 2016 when I was not eligible to contribute any. How do I fix this?

[dmertz · Accepted solution]

You must amend your 2016 tax return to report the excess contribution and pay the 6%, $330 excess contribution penalty for 2016.

For 2017, you'll either need to be able to apply the excess as an eligible Roth IRA contribution for 2017 or again pay a 6%, $330 penalty for 2017.  If you were eligible to make a Roth IRA contribution for 2017 but already made a separate contribution to a traditional or Roth IRA for 2017, you can obtain a return of contribution of the separate contribution to allow room to apply the excess as a 2017 contribution.

If after possibly applying any of the excess as a contribution for 2017 any of the excess is carried into 2018, you'll have to do the same for 2018 or obtain a regular distribution of the excess carried into 2018 to avoid another 6% penalty for 2018.

[Edited to change the excess contribution penalty to the correct amount of 6%, not 10%.]

[cjsmich]

Thanks for the quick response and help! Just a couple follow-up questions:

(1) where is the 10% coming from? It was my understanding that the excess contribution penalty is 6% per year that the excess remains in the account.

(2) I was also ineligible in 2017 to make a Roth IRA contribution, though I already contributed $5,500. I haven't filed my taxes for 2017 yet, so it's my understanding that I can re-characterize the Roth IRA as a Traditional IRA instead before the tax deadline. At this point, I would avoid the 6% penalty, but would need to pay the 10% early withdrawal penalty + taxes on earnings. Is that correct?

(3) Aside from the 5329 + 1040x for my amended 2016 return, which other tax forms will I need to fill out as a result of these two issues?

[dmertz]

(1)  Sorry, I guess wasn't quite awake when I answered.  Yes, it's 6%, not 10%.  I'll correct my answer.

(2)  Yes, you can recharacterize your contribution for 2017 to avoid it being an additional excess Roth IRA contribution added to the first one, but you'll still have the excess contribution for 2016 carried into 2017 that was not corrected in 2017.

(3)  The 2016 Form 5329 and Form 1040X will be sufficient for your 2016 amendment.

Your 2017 tax return will include 2017 Form 5329 to report that the excess from 2016 went uncorrected in 2017 and will incur another 6% penalty for 2017.  Your 2017 tax return must also include an explanation statement describing the recharacterization.  If the resulting traditional IRA contribution is nondeductible, you'll have 2017 Form 8606 to report the nondeductible traditional IRA contribution for 2017.  If it's instead a deductible contribution, you'll have the deduction on Form 1040 line 32 instead of a nondeductible contribution on Form 8606.

[cjsmich]

(2) Yes, I should have mentioned -- in order to fully take care of my excess 2016 contribution, I'll withdraw the total excess amount of $5,500 but leave the earnings. Once I do that and re-characterize the 2017 Roth IRA contributions, I think I should be squared away.

(3) Great. Sorry if this is naive/uninformed, but where do I include the explanation statement for the re-characterization, and how do I determine if the resulting contribution is deductible vs. nondeductible?

(4) In terms of the 2017 contribution, after it's re-characterized, do you know if I can use the Backdoor Roth method and immediately convert back to my Roth IRA?

Thanks again for all of your answers, this is super helpful!

[dmertz]

Regarding (2), you still have a 6% penalty in 2017 for the 2016 excess carried into 2017.  By making the regular distribution of the excess in 2018, you'll avoid the same penalty again for 2018.

When you enter the original Roth IRA contribution for 2017 and in the follow-up indicate that you'll recharacterize it to a traditional IRA, TurboTax should immediately prompt you to compete an explanation statement regarding the recharacterization.

There is no need to wait to convert your traditional IRA to Roth.  Any distribution from the traditional IRA in 2018 that you convert to Roth will be reportable on your 2018 tax return.

[cjsmich]

Thank you @dmertz for your time and help with this!