Excess Roth contributions

[TXpiper]

Hello Community,

I’m looking for a CPA’s input on the following situation please. I requested a recharacterization last May, but  for some reason the investment company did not receive the request when I thought it was delivered. Now I have $3100 in excess 2022 Roth IRA contributions, but I have already contributed $6000 in 2022 to my traditional IRA. Can I recharacterize $3100 of my 2022 traditional contributions to 2023 and then recharacterize the $3100 Roth contributions as a 2022 traditional $3100 contribution? I am trying to avoid a return of excess. Any help to do this legally and legitimately would be greatly appreciated! Thank you!

[DanaB27]

No, if you made the contribution for 2022 in 2022 you cannot recharacterize it as a 2023 contribution.

You can recharacterize the Roth contribution as a traditional IRA contribution for 2022 and then apply the excess in the traditional IRA on the next year's return. But you will have to pay the 6% penalty on your 2022 tax return and you need to be sure that you are able to make the contribution for 2023.

To enter a recharacterization on your 2022 return (request this with your financial institution) :

1. Login to your TurboTax Account 
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" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

To apply the excess traditional IRA contribution to 2023 on your 2023 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. On the "Do you have any Excess Traditional Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022 (if it wasn't carried over).
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023.

[TXpiper]

Thank you kindly! As a quick follow-up, would the IRS allow me to transfer the excess Roth contribution to a non-retirement investment account to avoid either taking a return of excess at a (current) loss, or paying the 6% penalty? I am trying to make things whole with my tax return this year without losing money either way if that makes sense. Thanks!

[MichaelG81]

Yes, when you take you the excess plus interest on your ROTH, generally before April 15, 2023 you will avoid penalties. Since this was a Roth after tax dollar contribution there should be no additional taxes; unless you do not  remove the excess. What you do with the money is up to you; just cant go back to an IRA if you're over the limit. Roth contributions are made with after tax dollars in most cases to all cases, or you are taxed on Roth contributions; in other words your taxes should not change other than eliminating the penalty when removing excess plus interest.

@TXpiper 

[TXpiper]

Thank you both!

[fanfare]

if you do not want  a return of excess, you resolve it a different way.

apply this year's allowed contribution to the prior year, and do not use up that portion with a contribution for this year.  You will pay a 6% penalty for the year the excess is in there unresolved.

See form 5329.

@TXpiper