Unallowable IRA Contribution

[79BB]

We opened a Traditional IRA for my daughter, who is a student and had no earned income for 2019.  A contribution for 2019 was made to the IRA between January 1, 2020 and April 15, 2020.  Upon entering the information in TurboTax, we now see the contribution was not allowed and is considered an "excess contribution."  The information says the "excess contribution" can be withdrawn before July 15, 2020 in order to avoid a penalty.  Can this contribution, and earnings on the contribution be recharacterized to a Roth IRA?  Whether it is recharacterized as a Roth or moved/withdrawn to a normal investment account, can this be done using an on-line transfer request through her bank account that holds the Traditional IRA, Roth IRA and normal investment accounts? 

[macuser_22]

---

@79BB wrote:

 Can this contribution, and earnings on the contribution be recharacterized to a Roth IRA?  Whether it is recharacterized as a Roth or moved/withdrawn to a normal investment account, can this be done using an on-line transfer request through her bank account that holds the Traditional IRA, Roth IRA and normal investment accounts? 

---

No.  She must have taxable compensation of her own (money that the worked for) to make ANY IRA contribution.

You must ask the trustee of the IRA for a "return of excess contribution" and NOT just a normal withdrawal.   That is done in a special way that also calculates any earnings attributed to the excess  that also must be returned .  That will be reported in a 2020 1099-R next year with a code P1 in box 7 and the earnings in box 2a.    You will have to report that 1099-R on an amended 2019 tax return, if she is even required to file a tax return.

[79BB]

Thanks, but are you saying the excess contribution cannot be recharacterized as a Roth IRA?  I thought I read this could be done before July 15, 2020 which would basically nullify the original Traditional IRA contribution.

[macuser_22]

---

@79BB wrote:

Thanks, but are you saying the excess contribution cannot be recharacterized as a Roth IRA?  I thought I read this could be done before July 15, 2020 which would basically nullify the original Traditional IRA contribution.

---

Yes.  It cannot be.

A recharacterization just means that the original contribution (that is not allowed) is treated as never happening and was made to the Roth instead (what is also not allowed).   A recharacterization *is* a IRA contribution but to the other IRA - no different than a direct contribution to the Roth in the first place. that is not allowed.

The most you can contribute to all of your traditional and Roth IRAs is the smaller of:
For 2019, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or
your taxable compensation for the year.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deducible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355

See this IRS article for Roth contribution limits:

https://www.irs.gov/retirement-plans/roth-iras

[79BB]

Thank you.  Your feedback is much appreciated.