ROTH conversion and Excess Contributions prior to conversion

[cstudiostax]

I over contributed 11,995 to my IRA for 2019 and 2020 in July of 2020 after having contributed to the ROTH limit -- I didn't know the 7000 dollar limit was across both the Standard IRA and the Roth . 

To make things more interesting, I did a Roth Conversion for  16,131 which was basically the 11955 excess contribution with 4176 in additional  growth.  IRA 1099-R shows Gross distribution of 16,131 and taxable amount of 16,131

Questions Below:

1.  Do I pay taxes on the full 16,131 if I take the excess 11955 out?

2.  Should I wait till after October to take excess out because of the growth?  (since the growth was dramatic)

3. If I wait till after October, will the gains be taxable in the future?

4. If I wait till after October, I'll have to pay 6% excise tax on the 11955 correct?

5.  Are there any other taxes that I'd need to pay other than the excise tax?

6. If I take the excess prior to April 15th, I'd pay taxes on the 4176 at my standard rate correct?

7. Would I need to include the total gains in the ROTH in the net income attributable calculation or is that done in the IRA side prior to the conversion?

8. What forms are involved?

[DanaB27 · Accepted solution]

1. Yes, you will have to pay taxes on the $16,131 conversion amount unless you  made/make the contribution to the traditional IRA as nondeductible and it was/is reported on Form 8606. Please see backdoor Roth example for more details how to enter nondeductible traditional IRA contribution and the conversion in that case.

2. It depends, if you prefer to leave the earnings in the account and are ok to pay the 6% excess contribution penalty on the $11,995 for 2020 then you should wait until after October 15, 2021.

3. It depends, when you take the Roth distribution. If you make a qualified distribution, made after the 5-year period and after you reach 59 ½, from your Roth account then the distribution of the earnings will not be taxable. Please see Are Distributions Taxable? for more details.

4. Yes, if wait until after October 15, 2021 you will have to pay the 6% penalty tax on the $11,955.

5.No, there are no other tax on the $11,955 excess contribution on the 2020 return.

6. Yes, if you want to avoid the 6% penalty on your 2020 return for the 2020 contribution then you need to take out the 2020 excess contribution and earnings before the due date. The earnings will be included in your 2020 taxable income. You also will have to pay a 10% early withdrawal penalty on these earnings.

You still will have to pay the 6% penalty on the excess 2019 contribution on your 2020 tax return since you did not withdraw them by December 31, 2020.

7. Please be aware, since you contribute to both a traditional and Roth IRA in the same year, the excess is deemed to have occurred in the Roth IRA. Therefore, the gain/earnings will be calculated using the last (excess) contribution to the Roth.

8. The 6% excess contribution penalty and the 10% early withdrawal penalty are calculated on Form 5329.  If you had nondeductible traditional IRA contribution, then this will be reported on Form 8606.

[cstudiostax]

Wow!!!

Thanks for the answers.  Just one last question on number 1.

The 11,955 contributed to the traditional IRA was with after tax dollars, the 16,131 is composed of that plus 4176 in gains prior to the conversion -- side note, the gains occurred really fast within a month.

1. Would I just pay taxes on the 4176?

2.  If so then use form 8606 correct?

3. Do I need to override my brokerage's 1099-r with a new 1099-R -- is that even a thing?

[DanaB27]

1.Yes, if your basis was $11,955 (after-tax contribution) then only the gains of $4,176 would be included in your taxable income.

2.Yes, you will use Form 8606.

3.No, you would enter the 1099-R as shown on the form following the steps below.

First enter the nondeductible 2020 traditional IRA contribution:

1. Open your return
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contributions before this tax year.
9. If you had a basis in the Traditional IRA before then enter the amount.
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

Then enter your 1099-R

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
5. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contribution to your IRA?"
8. Answer the questions about the basis