Roth IRA recharacterization missed deadline

[eleelee]

I contributed $3000 to my Roth IRA in 2023.  I didn’t realize my AGI was too high in 2023 until January 2025.  I know it is too late to recharacterize. What are my options now to fix this?  

[dmertz · Accepted solution]

You must obtain a regular distribution of the amount of the excess with no adjustment for investment gain or loss.  When making this regular distribution, tell the IRA custodian nothing about this distribution being to correct an excess contribution, doing so will only potentially cause them to process the distribution incorrectly.

This distribution will be a nontaxable distribution of Roth IRA contribution basis.

Because the excess will not be corrected until 2025, you'll have excess contribution penalties on both your 2023 and 2024 tax returns.  The reporting of the distribution on your 2025 Form 5329 will eliminate the excess.

[eleelee]

But won’t the regular distribution be taxed at the current tax rate since I am under 59 1/2?  Is it possible to use the excess and transfer it to 2025 IRA ( not Roth ) contribution? 

[dmertz]

The distributions of the excess contributions mad in 2019 through 2023 will be nontaxable distributions of contribution basis.  The distributions will be included on Form 8606 Part III where contribution basis will be subtracted to determine that the taxable amount is zero.

The only contribution for which the deadline has not passed to recharacterize to be a traditional IRA contribution instead is the contribution made in 2024.

[eleelee]

Got it thanks! Do I submit Form 8606 with my 2024 tax return?

[dmertz]

You'll have a 2024 Form 8606 reporting on line 1 the traditional IRA contribution that results from the recharacterization of the 2024 Roth IRA contribution, assuming that that traditional IRA contribution is nondeductible.  TurboTax will automatically generate Form 8606 when needed.

Regular distributions in 2025 of the excess contributions made for 2019 through 2023 will appear on your 2025 Form 8606 Part III (assuming that you are under age 59½, meaning that these distributions are not qualified distributions that would not be reportable on Part III).

[eleelee]

my custodian had an excess contribution self-serve process. i ended up doing that and it was very simple. 

[DanaB27]

As dmertz mentioned you need request a regular distribution and not a return of excess contribution for the 2023 excess contribution. Please verify that you requested a regular distribution. The custodian shouldn't accept a return of a 2023 excess contribution since the deadline has passed.

[eleelee]

the custodian moved my $3000 plus $600 increase since my March 2024 contribution to my individual brokerage account held at the same custodian. is that correct what they did? 

[DanaB27]

If you removed an excess contribution for 2024 then yes, you will request the return of excess contribution plus earnings. But if you removed an excess contribution for 2023 then you need to take a regular distribution of the excess contribution amount (no earnings or losses) since it is after the extended due date of the 2023 return.