IRA Recharacterization

Submitted by Greg Westley on Wed, 2016-10-12 20:58

I recharacterized an IRA that fell in value. I contributed $5500 in 2015, but the value dropped to $4900 when I recharacterized in 2016. I have an excess contribution from 2014. Does the $600 under-contribution in 2015 reduce the 2014 excess contribution?



Submitted by Alan - IRA critic on Wed, 2016-10-12 21:53

  • Recharacterizing is changing the contribution from one type to another. Did you do that or did you have the contribution for 2015 returned to you leaving you with no 2015 contribution to either type of IRA?  What type of IRA was the 2014 excess contribution? 
  • If you made NO contribution for 2015 because you had it returned, and you were eligible to make a contribution in 2015 to the same type of IRA as the 2014 excess, you would file a 5329 for 2015 that would apply your excess 2014 excess amount to 2015 and reduce your 6% excise tax accordingly.
  • 600 would not apply in any case, because if you had the contribution returned, then you made no contribution, but if you had it recharacterized, you still are considered to have made a 5500 contribution and there would be no room to apply any of the 2014 excess.
  • If you answer the prior questions, we can determine what your best options are now. Have you made any 2016 contributions?


Submitted by Greg Westley on Wed, 2016-10-12 23:02

I recharacterized my 2015 Roth contribution to a TIRA.  The 2014 excess contribution was to a Roth IRA.  I have not made any 2016 contributions yet.



Submitted by Alan - IRA critic on Wed, 2016-10-12 23:45

Under those circumstances you cannot apply any of the 2014 excess to 2015. If you are eligible for a Roth contribution for 2016 that you obviously did  not make, you could apply the 2014 Roth excess as your 2016 contribution. As it stand now, you owe the 6% excise tax for 2014 and 2015. Your 2015 recharacterized contribution is probably not deductible, meaning that you would file an 8606 for 2015 to report the non deductible contribution of 5500 (not 4900). Or, if you do not qualify for a 2016 Roth contribution and therefore cannot apply the excess to 2016, you can withdraw the excess amount (no earnings adjustment on this) before year end and eliminate another 6% excise tax for 2016. Further, if you want to withdraw your 2015 recharaterized contribution (now TIRA), you must have completed that by Monday, 10/17. Since it is probably still underwater, there would be no earnings coming out with it. This assumes you either filed your 2015 return by 4/17 or filed an extension by then.



Submitted by John Stevens on Thu, 2016-10-13 14:10

Thanks Alan. Your the best. I only have a few tax questions a year and you always come thru quickly – I might add. Thanks to Ed Slott and the services he provides to our industry and profession. John Stevens  



Submitted by Greg Westley on Mon, 2016-10-17 18:10

An excess must be applied to the same type of IRA? My excess was to a Roth, so an under-contribution to a non-deductible traditional can’t be applied to reduce the Roth excess? I don’t know if I will be eligible for a Roth in 2017, so should I withdraw my excess contribution? Thanks very much for the answers. You’re the best.



Submitted by Alan - IRA critic on Mon, 2016-10-17 18:55

  • Correct. After the extended due date passes and the excess is not withdrawn or recharacterized, Form 5329 applies it only as eligible contributions to the same IRA type as the excess. With a 2014 Roth excess, it can only be applied as a Roth contribution. Therefore, if you are not eligible for a Roth contribution for 2016 the form will not allow you to apply the prior excess as a 2016 Roth contribution. If you withdraw the excess amount by year end (no earnings calculation since the 2014 due date has passed) it will eliminate any excise tax for 2016. Further, since you are withdrawing a regular Roth contribution, there will be no tax or penalty, but you will have to report the distribution on Form 8606.
  • Are you sure that your modified AGI for 2016 will be too high to qualify for a Roth contribution for 2016?


Submitted by Greg Westley on Fri, 2016-10-21 23:36

I am not sure that my modified AGI for 2016 will to too high, but it could be.



Submitted by Alan - IRA critic on Sat, 2016-10-22 00:04

Then it would be safer to just withdraw the contribution and eliminate a 2016 6% excise tax. It if turns out that your MAGI allows a contribution for 2016, since you withdrew the excess and did not apply it to 2016, you will have until 4/17/17 to make a Roth contribution for 2016, offsetting the amount you withdrew. Of course, you could end up in the contribution phaseout range, where you are only allowed a partial contribution and could contribute less than you withdrew.



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