IRA Conversion issue
In 2011, person whose income disqualifies them from making direct contribution to Roth IRA makes a $5,000 contribution to Traditional IRA and immediately converts the account balance to her Roth IRA. Unfortunately the existing balance contained $.04 resulting in a conversion of $5,000.04, $.04 above her $5,000 annual limit (she’s under 50). Failing having the custodian correct this as a clerical error, what options exist? She has enough in the Roth IRA to reverse the transaction. Would this necessitate a re-characterization? Assuming this can be reversed or re-characterized will she be able to make her 2011 contribution again before the April 17th tax deadline?
Thanks again for your help!
Permalink Submitted by Alan Spross on Thu, 2012-03-01 15:51
This is not a problem at all. Under rounding rules, 5,000 is the conversion amount.
More importantly, the conversion amount is not restricted and is unrelated to the regular contribution amount. She still made a regular TIRA contribution of 5,000, and then converted whatever the value in that IRA was. If she is able to deduct the 5,000 contribution, the tax on the conversion will exactly offset this, and if she does not deduct it and shows it as a non deductible contribution on Form 8606, then the conversion is tax free and the end result is the same with respect to 2011 taxes. This all assumes that she only had this one TIRA account.
However, if she has any other TIRA accounts in addition to the one mentioned, then the pro rate rules apply to the conversion and the total balance of all her TIRAs must be shown on Form 8606 in order to calculate the taxable amount.
There is no reason to recharacterize this conversion unless she has additional TIRA accounts that cause the conversion to be taxable and she does not want to pay the taxes on the conversion.
Permalink Submitted by danica bal on Fri, 2012-03-02 04:23
Its not a big problem. Fill out Form 8283 Section B if noncash contributions exceed $5,000.