Need to Reverse Roth IRA Contribution … income too high

Submitted by Nate Millerbernd on Thu, 2016-03-17 19:20

We had our taxes done and our income ended up too high to make a ROTH IRA contribution for 2015. We made the $6500 contribution for me and a $5500 for my wife in November. Both contributions have some gains in them now.
I am curious on the rules to take the roth money back out.

Thanks.



Submitted by Alan - IRA critic on Thu, 2016-03-17 19:44

  • A return of contribution can be requested and you will get back the contributions adjusted for the gains. The gains will be taxable IN the year the contribution was made. There is also a 10% penalty on the amount of gain for any spouse not yet 59.5 at the time of the distribution.
  • An alternative to the above is to request that the contributions be recharacterized as TIRA contributions. But if either of you is covered by a retirement plan at work, the TIRA contribution cannot be deducted. That would leave you with a non deductible TIRA contribution that would be reported on a 2015 Form 8606 for each spouse. If a spouse does NOT have any pre tax IRA balance, that spouse could then convert back to Roth and only pay taxes but no penalty on the amount of gain. This conversion would be reported on Form 8606 for 2016.
  • If a spouse DOES have a pre tax balance in any non Roth IRA, a conversion would be mostly taxable. To avoid these taxes, that spouse could roll the pre tax balance into their current employer plan if the plan accepts IRA rollovers. This can be done anytime before year end, even if the conversion of the 5500/6500 is done now.
  • So each spouse has a choice between the above 2 solutions, and the spouses do not have to select the same solution.
  • Hopefully, the return has not yet been filed, or it will have to be amended.

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