Roth excess contribution

Submitted by steve jackson on Mon, 2016-04-04 23:14

Clients is a single filer( above age 50) and made full $6,500 contribution, AGI is 118,400 ( may not be exactly correct because of preparer but probablly close) so $2,400 above bottom threshhold. To be safe is it prudent to recharacterize a little extra before converting back into the Roth. Client has no IRA’s so proration is not an issue. Will convert excess in IRA back into the Roth.What is best way to calculate the amout t0 be recharacterized? Preferred calculator? IRS form.
Tks



Submitted by Alan - IRA critic on Tue, 2016-04-05 00:57

  • If there is no faith in the actual MAGI figure and the recharacterization decision must be made now, then client should determine the estimated gain. With a larger gain, the post recharacterization conversion will have more taxable income from the gain and the conversion will have a higher taxable portion subject to the conversion 5 year holding period. If there is a loss or no gain, might as well recharacterize the entire contribution since the conversion will be non taxable and as such there is no 5 year holding period (but there will be a smaller regular contribution balance available for tax and penalty free non qualified distributions before 59.5.
  • Of course, with the exact MAGI figure, Pub 590A has worksheets to determine the excess amount and only that amount should be recharacterized and converted. Remember there is no waiting period to convert a recharacterized regular contribution, just a recharacterized conversion.
  • If for some reason the recharacterization falls short and a small excess remains, paying the 6% on a small amount is very little and the following year contribution can be reduced to absorb this excess amount. If a recharacterization ends up falling far short and leaving a large excess, an additional recharacterization can always be done up to the extended due date.

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