I contributed to a Roth IRA in 2023 for the years 2022 and 2023. I figured this year I am not eligible for Roth since I filed my taxes as MFS. After some research, I am considering a Roth recharacterization. I don't have any existing Traditional IRA account (no pre-tax money). So I think I don't have an issue with pro-rata calculation. As I understand, the gains on the money in taxable after recharacterization to traditional IRA (I will backdoor it as soon as recharacterization is done). My questions are:
Thank you.
recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but are ignored. You must use a trustee-to-trustee transfer.
report this on your tax return for the year during which the contribution was made.
you can recharacterize a 2023 contribution beforeTax Filing Day, including extensions if you request an extension.
It is too late to recharacterize a 2022 contribution.
after tax due date including extensions: you distribute the excess amount being carried forward on 5329,
(or offset it with currently allowed contribution) .
An amended return will be needed supplying Form 5329 since there is a 6% penalty per year on excess contributions .
Any positive earnings stay in the Roth account.
Thank you for the reply. Few questions:
Thank you!
When recharacterized, earnings (positive or negative) move but are ignored.
Pub 590A talks about the year for which the contribution was made, not the year in which the contribution was made.
yes, I added a sentence about Form 5329.
you withdraw exactly that amount, or the entire amount whichever is less.
I may be wrong about the penalty of 6% for 2022 since the excess was contributed in 2023.
So we have to go to the tax-favored-accounts guru, @dmertz to see if he agrees or disagrees.
Got it. Since I may not be eligible to contribute to Roth anytime soon (even if I file as MFS), I might as well withdraw the 2022 contribution. From what I read, I have to withdraw the contribution and gains , pay early withdrawal penalty of 10% and pay taxes on the gains. Am I correct ?
Please see again the rules for excess removal
after tax due date including extensions:
above
fanfare is correct that the only thing you can do with regard to the excess contribution made for 2022 is file a 2022 Form 5329 and pay the 6% excess-contribution penalty for 2022, include the excess on your 2023 Form 5329 and pay the 6% excess-contribution penalty on the 2022 excess contribution again with your 2023 filing, then obtain a regular distribution of exactly the amount of this excess with no adjustment for earnings. The regular distribution will be subtracted from this excess on your 2024 Form 5329 to eliminate the excess for 2024 and beyond.
Thank you for the detailed reply. I see Fidelity defines timely correction of Roth excess contribution as:
"A timely correction is a withdrawal before the tax-filing deadline (plus extensions) in the year you made the excess contribution". By this definition, since I made the 2022 contribution in 2023, I should have time to withdraw excess contribution this year without penalty. Won't it ultimately depend on (whether I have to pay fine or not) how fidelity is submitting the 1099r form? I would appreciate it if you could clarify?
It's debatable. Fidelity is paraphrasing section 408(d)(4) of the tax code:
(4)Contributions returned before due date of return
Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if—
(A)such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year,
However, section 219(f)(3) creates the legal fiction that a contribution for the preceding year was made on December 31 of that preceding year:
(3)Time when contributions deemed made
For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).
Because section 219(f)(3) says, "For the purposes of this section," it's not clear if that carries over to section 408(d)(4) because the it relates to the same contribution.
Thank you, it seems the appropriate way to handle the 2022 contribution is to pay penalties for 2022 and 2023 as you suggested. I really appreciate your time on this.
I've modified my previous reply slightly. The interpretation of these two sections of the tax code together does not seem entirely unambiguous.
It is confusing. I am back for another question. Based on your answers and other threads, should I then depend on how Fidelity treats the situation and completes the 1099-R form? If Fidelity says the excess return is a timely correction, then I shouldn't volunteer to pay penalties for 2022 and 2023. Do you agree? Any other suggestions based on your experience?
An excess contribution corrected by the due date of the tax return is not subject to penalty. It's treated as never having been made.
I've never been able to find any specific IRS guidance on the issue, but it's my belief that the deadline for obtaining a return of a 2022 to avoid a penalty for 2022 is the due date, including extensions, for the 2022 tax return, even if the contribution was made in 2023. I have heard of cases where an IRA custodian seemed to think otherwise, though.
Fidelity will do what you say .
check the appropriate box on your form
You will submit a form for each year of interest.
recharacterize assumes you have a traditional IRA or agree to open one for this purpose.
Don;t select an option that is not available to you.