Did back door roth, turns out had no income for the year…. how to undo?
So…. it is a really long story but client is a high earner, and we set him up with a Solo K, made the max contributions, and put him in the business of doing back-door Roths. His business wound up having a loss this year, and he won’t be showing earned income. Backing out the Solo K is easy enough as an excess withdrawal. But the back door roth is another matter as the conversions are now irreversible thanks to TCJA….. How do we go about reversing his back door roth since he did not have earned income to support the contribution which has since been converted…..?
Permalink Submitted by Alan - IRA critic on Mon, 2024-12-30 20:07
This is a bad combination of transactions to correct.
If a partial distribution from the solo K or any other retirement account client may have can be done to an IRA, there would be funds to process a return of the excess IRA contribution. That would be the easy way as it would allow the conversion to remain. But this probably isn’t possible.
Another easy way that the custodian will probably not buy into is to treat the conversion as a failed conversion (ineligible money) as a failed conversion is not a conversion by IRS definition, was therefore a regular contribution and a regular Roth contribution can be recharacterized back to the TIRA. The custodian will likely not understand or cooperate with that solution either.
Otherwise, it gets messy as the client would have to explain to the Roth custodian that the conversion was a failed conversion because there was no income to support the IRA contribution that was converted. The conversion would have to be treated as an excess regular Roth IRA contribution and removed from the Roth IRA by corrective distribution rather than recharacterization. Unfortunately, even if the Roth custodian understood what they should do, the tax reporting for these transactions will not be consistent with the 5498 form the custodian will issue reporting the conversion contribution.