Excess Roth Contribution
Client is filing MFS and has made an excess Roth contribution for 2018 since income is too high and they live with their spouse. I would like to make a nondeductible contribution to the IRA and then convert to the Roth – Backdoor Roth.
Is there a difference between recharacterizing the excess Roth contribution to an IRA and just withdrawing the excess Roth contribution and then making a non deductible contribution to the Traditional IRA? I think it would be easier on the client to just withdraw the contribution since we are switching custodians with the money. The contribution in the Roth account is currently at a loss.
Permalink Submitted by Alan - IRA critic on Tue, 2018-10-23 16:47
Because of the loss on the Roth contribution, removal will not result in any tax or penalty and recontribution as a ND TIRA contribution allows client to make a full contribution replacing the loss. Therefore, removal works best with a loss and recharacterization works best when there is a gain. With recharacterization, the gain will be taxed when the recharacterized contribution is converted to Roth, but the 10% penalty on the gain is avoided.