Ineligible IRA contribution then converted to a Roth IRA
Hello all. Looking for a little help with this scenario. An $8000 contribution was made into an IRA account. Then a back-door Roth conversion was completed. Determined later that the IRA contribution was ineligible as they had no earned income. Since recharacterization is not allowed, would you do a 100% return of excess contribution from the Roth or code as a normal distribution?
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2024-08-28 18:12
Since it is not totally clear that conversion of an excess contribution is a failed conversion which the custodian might be able to recharacterize (note a failed conversion is not treated as a conversion), that leaves the only solution as convincing the Roth custodian to treat the entire 8000 as an excess regular Roth IRA contribution and removing it from the Roth. This procedure depends on whether the extended due date has passed or not. For example, if this was a 2023 contribution and the taxpayer filed on time or filed an extension, they have until 10/15/2024 to request a return of the Roth excess adjusted for gain or loss. This would eliminate the excise tax for 2023. Otherwise, the 8000 would have to be removed, the 2023 excise tax is due, and a 5329 would have to be filed for 2023 and 2024 (no excise tax for 2024).