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Level 1

Roth Overage

Hello,

 

I' contributed to a Roth over 2020, but my income happened to exceed the allowable limit, so I'm receiving an overage notification within TurboTax stating I need to withdraw or be penalized year after year until corrected.  The entire amount of my contribution appears to be at play, so what is the recommended method to deal with the Roth moneys? 

 

I have a 401k and additional IRAs.  Roth appealed to us, because of it being liquid as well as the tax shelter for our future.  If converted to a regular IRA,  we would lose the benefit of having the contribution amount as liquid just in case we ever find ourselves in a pinch again, job loss, unknowns, etc.

 

I'm also uncertain what the ramifications may be if we transfer the Roth moneys to our Money Market account.  What will it mean with respects to out 2020 taxes and is there a recommended approach.

 

We're married filing jointly with only one income, should that assist in the answer.  Thank you in advance.

1 Best answer

Accepted Solutions
Employee Tax Expert

Roth Overage

You can recharacterize your Roth contribution to a traditional IRA and make it nondeductible if your contribution to the Roth was limited because of your income. Then you will be able to convert it to a Roth IRA and the nondeductible part (basis) won't be taxable. This is called backdoor Roth IRA. Please see What Is a Backdoor Roth IRA? And How Does It Work? for additional information.

 

Another option is to withdraw the excess contribution and earnings by the due date, but then you would miss out on a contribution for 2020 if your contribution to the Roth IRA was limited by your income.

 

The total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

  • $6,000 ($7,000 if you're age 50 or older), or
  • If less, your taxable compensation for the year

 

 

If you decide to do this you will have to tell your bank that you want to recharacterize the Roth contributions as a traditional IRA contribution before the due date of the return (you will have to enter this on your 2020 tax return, please see below). There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. You will receive a 1099-R for the recharacterization.

 

Then later in 2021 you can convert the amount to a Roth IRA (this would be entered on your 2021 tax return).

 

 

You will enter the recharacterization when you enter the contribution to the Roth IRA (on your 2020 tax return):

  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 “Roth IRA
  5. Answer “No” to “Is This a Repayment of a Retirement Distribution
  6. Enter the Roth contribution amount 
  7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
  8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
  9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

[Edited 1/21/2021 | 6:44am PST]

@rj1278 

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3 Replies
Employee Tax Expert

Roth Overage

You can recharacterize your Roth contribution to a traditional IRA and make it nondeductible if your contribution to the Roth was limited because of your income. Then you will be able to convert it to a Roth IRA and the nondeductible part (basis) won't be taxable. This is called backdoor Roth IRA. Please see What Is a Backdoor Roth IRA? And How Does It Work? for additional information.

 

Another option is to withdraw the excess contribution and earnings by the due date, but then you would miss out on a contribution for 2020 if your contribution to the Roth IRA was limited by your income.

 

The total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

  • $6,000 ($7,000 if you're age 50 or older), or
  • If less, your taxable compensation for the year

 

 

If you decide to do this you will have to tell your bank that you want to recharacterize the Roth contributions as a traditional IRA contribution before the due date of the return (you will have to enter this on your 2020 tax return, please see below). There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. You will receive a 1099-R for the recharacterization.

 

Then later in 2021 you can convert the amount to a Roth IRA (this would be entered on your 2021 tax return).

 

 

You will enter the recharacterization when you enter the contribution to the Roth IRA (on your 2020 tax return):

  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 “Roth IRA
  5. Answer “No” to “Is This a Repayment of a Retirement Distribution
  6. Enter the Roth contribution amount 
  7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
  8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
  9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

[Edited 1/21/2021 | 6:44am PST]

@rj1278 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

Level 1

Roth Overage

Thanks @DanaB27 ,

 

A couple of additional questions.  According to the article you posted, If I convert my Roth into a Traditional IRA, I can avoid the overage I'm faced now.  However, I read if I convert the traditional IRA back to a Roth I will have to pay taxes again?  Is that correct?  If so, that would suggest paying twice.  Would it make more sense to switch my work's 401k to a Roth instead of its current IRA?

 

Thanks.

 

Employee Tax Expert

Roth Overage

Yes if you switch/recharacterize your Roth contribution to a traditional IRA  then you can avoid the excess contribution penalty (assuming that excess contribution is only due to MAGI and not because you had insufficient compensation to support an IRA contribution or were over the annual limit).

 

If you select to make the contribution nondeductible (step 9) then only the earnings will be taxable when you convert the traditional IRA to Roth IRA.

 

If you convert your 401k to the Roth than that will also be taxable unless you have a basis (after tax contributions) in your 401k.

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