Can Roth contributions be reclassified?
Hi,
Spouse and I have already invested the maximum Roth $5K amounts (each) for 2012. We expected the combined taxable income to be below the $173K in 2012.
Question is – what can be done if the combined taxable income goes over $173K (or even over $183K)? I read that the Roth contributions can be reclassified as Traditional IRA. But I am already contributing to my SEP through my S-corp. So I am not sure if such a reclassification is possible.
Can the Roth contribution be taken back as though it never happened, like a recharacterization of a conversion? Is there a penalty?
What are our choices here in case the income goes over the limit?
Thanks in advance!
Permalink Submitted by Alan Spross on Mon, 2012-06-18 16:17
Choices are:
1) Just request a return of your Roth contributions as excess contributions. This can be done anytime prior to 10/15/2013, and allocated earnings on the excess contributions would be taxable in 2012 and subject to 10% penalty if under 59.5.
2) Ask the custodian to recharacterize your Roth contributions as TIRA contributions. These would not be deductible and would be reported on Form 8606 as non deductible. You could then convert to a Roth IRA, but the conversion would be mostly taxable because of your SEP IRA and perhaps other TIRA accounts you have. However, your spouse may not have such other SEP or TIRA amounts and their conversion would then be tax free except for any earnings generated on the contribution. The deadline to recharacterize is also 10/15/2013.
One spouse can make a different choice than the other. For example, you might request a return on your contribution if you cannot convert tax free, but if spouse can convert tax free they might choose recharacterization and conversion, and end up with the same result as if the Roth contribution had been permitted.
Permalink Submitted by Jai Nayak on Tue, 2012-06-19 04:30
Thanks for the detailed information. That was very helpful!