fixing ineligible Roth contribution

Submitted by Jason Frank on Mon, 2014-03-31 13:37

I had a client who has now realized that his income was too high to contribute to a Roth IRA in 2013. He is sure that he will qualify this year, so I suggested moving the contribution to 2014.

However, upon reading the fine print on the fund company’s “Excess/Ineligible Contribution” form, I am unclear on whether he will still be assessed the 6% excise tax. I was under the impression that he would not as long as we get the recoding done before April 15th. The form is making wonder if I am wrong about that. Any help would be greatly appreciated!



Submitted by Alan - IRA critic on Mon, 2014-03-31 16:36

  • If he made the 2013 contribution IN 2013, he must either remove it with any earnings, recharacterize it as a non deductible TIRA contribution, or pay the 6% excise tax and leave the contribution and any earnings in the Roth and then apply it to 2014 on Form 5329. The last solution is usually beneficial only if there are substantial earnings, eg 30% or so. Solution 2 works well if he has no non Roth IRA pre tax balance as he could then recharacterize to TIRA and convert back to Roth right away (back door Roth strategy).
  • 3 choices – need to know his approximate earnings % on his contribution and if he has a non Roth IRA balance to determine the best option of the 3.

Submitted by Jason Frank on Mon, 2014-03-31 16:52

So he pays the 6% excise tax EVEN if he gets it recoded to 2014 before the tax deadline?  I ask because the fund company is telling me there would be no excise tax if done by April 15th.Thanks!

Submitted by Alan - IRA critic on Mon, 2014-03-31 17:40

When did he make this contribution?  My prior post assumed it was made in 2013, but the fund company re coding option suggests it was made in 2014.

Submitted by Jason Frank on Mon, 2014-03-31 18:11

The contribution was made in November of 2013 as a current year contribution.  The fund company is saying that the contribution and earnings can be “recoded” to 2014 and the excise tax can be avoided if done by April 15th.I’m confused!  Thank you for your help!

Submitted by Jason Frank on Mon, 2014-03-31 18:13

Maybe “recoded” is the wrong term.  They can be removed and classified as 2014 contributions instead.

Submitted by Alan - IRA critic on Mon, 2014-03-31 18:46

OK, that makes sense if client wants the excess removed. Any earnings will be taxable and subject to penalty on their 2013 return because the contribution was made in 2013. The fund company will make the corrective distribution, but instead of refunding all of it, they will take the contribution amount and make the 2014 contribution with it. The earnings would be returned to the client if a full contribution was made because there would be no room for them as a 2014 contribution. Again, the other two options remain. But since the contribution was made in November, there probably was not enough time to accumulate enough earnings that would make paying the 6% excise tax worthwhile just to keep the earnings in the Roth and eliminate the taxable distribution of earnings.

Submitted by Jason Frank on Mon, 2014-03-31 18:54

Great, thanks for your help!

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