Excess Roth Contributions and Roth conversions

[JuanV1]

I made excess Roth contributions in 2020. I plan to amend my return for 2020 and file the 5239 and pay the penalty. Ill pay the penalty again for 2021. I plan to withdraw the 2020 contribution this year.

I made excess Roth contributions again in 2021 for myself and my spouse. I thought about recharacterizing these contributions and funding a traditional IRA and then doing a Roth conversion. Seems like a good idea because the money stays in the Roth. We currently only have Roth IRAs and no traditional IRAs.

Here is the issue. I'm planning on doing some  Roth conversions this year from my 401k. If I recharacterize the 2021 Roth contributions as traditional, then convert to Roth, will that impact my 401k Roth conversions or vice versa. I'm concerned excess Roth contributions will somehow be taxed.

Am I setting up a reporting headache for the next year? Should I just withdraw the 2021 Roth contributions to make things cleaner?

Thanks in advance for the help

[RobertB4444 · Accepted solution]

Your retirement plan recharacterizations are only taxable based on the account they end up in.  As long as your broker manages the recharacterizations properly and you enter them properly on the return there should be no issues.  

The rollover from the 401K will be a separate transaction entirely and should be unaffected by the Roth recharacterization of your excess contributions.

Here is an article from TurboTax on IRA recharacterizations and here is an article on the difference between recharacterizations and conversions.

[fanfare]

@JuanV1 

you know that if you pay the penalty and wait until after the due date, including extension, for the year you made that excess contributions, you can leave all  the earnings in the Roth IRA.

I haven't considered how it works if you make another excess contribution in the following year.

At a minimum, your penalty will then be 6% of both excess contributions.