esces contribution to Roth to move to non deductible IRA
I have a client that does not qualify to make a contribution to her Roth IRA for 2008 an she will be taking that out but wants to contribute the excess to a non deductible IRA . A- is that possible? B- will the non deductible IRA produce a 5498 showing the nondeductible contributions. I want to learn about the tax reporting side of the non deductible IRA. thanks
Permalink Submitted by Alan Spross on Thu, 2009-02-05 22:52
I assume her income is too high. If so, she can have the Roth contribution recharacterized as a traditional IRA contribution. It is then transferred to a traditional IRA of her choice. An earnings allocation must be made to determine the exact amount to be moved to the new IRA. Form 8606 needs to be filed if she cannot deduct that contribution to report the non deductible contribution on her 2008 return.
Of course, she must have earned income at least equal to the amount of the contribution or cannot contribute to a traditional IRA either.
A 1099R will be issued by the Roth custodian reporting the recharacterization and a 5498 issued by the traditional IRA receiving the contribution.
Recharacterization accomplishes in a single step what would otherwise be done by just withdrawing the excess contribution from the Roth and re contributing to the TIRA. The difference is that any positive earnings do not get into the TIRA if done this way.
However, this year many people have LOSSES on their contributions. In that situation, the reduced earnings adjusted amount could be distributed from the Roth and a full maximum amount used to re contribute to the TIRA. That would leave more funds in an IRA. The reverse is true if the earnings calculation produces a gain.