Excess Roth IRA contributions - options for removing money?

[Anonymous]

My husband JUST found out he is getting a large bonus this year that will put his MAGI too high to contribute to his Roth IRA.  We have already funded $4000 into it for the year.  Since it needs to be taken out to avoid penalties, my question is: what are his options? 

A tax person told me he HAD to remove it from the Roth account and put it into the core holding account of the brokerage firm.  I then saw that there are no income limits on a traditional IRA, so I'm wondering if it's better to convert his Roth to a Traditional IRA or if that's a no-no.  If there was interest earned on the $4k that he contributed this year (unlikely given the current market, ha ha!), would that interest need to be moved to the core holding account so that he's not overfunding a traditional IRA?  Maybe we should let it all become a traditional IRA and then add to the balance to get it to the $6000 cap? My last question is if he has to REMOVE the money, as opposed to converting the money from Roth to Traditional, is moving it to the core account good enough for the feds, or do I need to have the brokerage account literally send him a check for the money he contributed for the current year? We live in California, although I think it doesn't matter for this question...

My other question is a no-brainer I think: I don't work, and I've contributed to a spousal Traditional IRA all year.  Since there are no income limits and it's only been a Traditional IRA that I've funded, I don't need to do anything for my account, correct?

Thank you!

[tagteam]

@dmertz ?

[Critter-3 · Accepted solution]

You can re-characterize the Roth contribution plus the earnings to a traditional IRA so you don't have a Roth contribution problem. Tell the IRA plan administrator then it needs to be recharacterized not converted. Then if this is the only thing in any traditional IRA in his name then he can convert that to the Roth using the back door Roth conversion that is allowed. As far as you go, the traditional IRA contribution is allowed however if your income is too high it may not be deductible.

[dmertz · Accepted solution]

As Critter-3 mentioned, you have the option to recharacterize the contribution to be a traditional IRA contribution, but if your spouse (or you, but you said you are not employed) is an active participant in a workplace retirement plan, the traditional IRA contribution will be nondeductible due to your high modified AGI.  I assume that it's your spouse's Roth IRA contribution that needs to be recharacterized since you mentioned that your contributions are already traditional IRA contributions, not Roth IRA contributions.  You own traditional IRA contributions will also be nondeductible.  Because each individual's traditional IRA contributions (including the one resulting from the recharacterization) will be nondeductible, your 2022 tax return will include a Form 8606 for each of you.

The net gain or loss attributable to the contribution that is being recharacterized is required to accompany the recharacterized contribution from the Roth IRA to the traditional IRA.  The amount recharacterized and treated as a traditional IRA contribution will be $4,000 even though the amount transferred by recharacterization is different.

[Anonymous]

Great, you touched on everything! As Critter-3 mentioned, I will recharacterize his Roth to a Traditional IRA, mine is already a Trad. IRA, and I will then look for the Form 8606 for each of us when I do our taxes in February.  You are correct in assuming nothing will be deductible due to his workplace retirement plan and his income level for this year.  Thank you for all your help!

[Anonymous]

Thanks for all your help, I appreciate it!