Non-deductible IRA
This is similar to the excess contribution question. Client had excess Roth contribution (exceeded income limit). The custodian did a recharacterization into a non-deductible IRA – both contribution and gains.
The client is 52 year old. If the client closes out the non-deductible IRA is there any tax beyond the income tax on the gains ? Are the gains subject to the 10% penalty?
Permalink Submitted by mk foss on Fri, 2014-10-03 22:00
The nondeductible IRA has two types of funds, the former Roth contribution which is basis and the earnings which are subject to the 10% penalty. If this is the only IRA that the client has, closing it will trigger income tax on anything received in excess of the Roth contribution that was recharacterized. But if the client has other IRAs, he will have to go through the calculation on Form 8606 and a larger portion of the withdrawal will be taxable. Any amounts that are taxable to him will also be subject to the 10% penalty.