Affect of Conversion on Future IRA Contributions
Last year a contribution was inadvertently made to a Traditional IRA, but was intended for a Roth IRA. A recharacterization was performed to transfer the original contribution with associated earnings from the Traditional IRA to the Roth. Do the earnings on the original contribution have any impact on the amount that can be contributed in the subsequent tax year. For example if your recharacterized $6,700 in 2014 ($6,500 contribution and $200 earnings) from a Traditional IRA to a Roth IRA would the following year Roth contribution be limited to $6,300?
My assumption is that the earnings are taxable income given that this is recharacterization from a Traditional to a Roth. If so, why should the following year contribution be impacted? I am receiving mix signals on this so I appreciate any clarity you can provide. Thanks for your guidance.
Permalink Submitted by Alan - IRA critic on Tue, 2015-12-15 17:52
Note that if an IRA contribution is returned under a return of contribution or excess contribution rules, then earnings will be taxable. They are taxable in the year IN WHICH the contribution was made. Again, this would not directly affect the amount of a contribution for that year, but it would increase MAGI by the amount of the earnings and is is possible that the higher MAGI would cross one of the MAGI thresholds to make regular Roth IRA contributions.