Undo a backdoor Roth Conversion
I had a client who asked to do a non-deductible IRA contribution and then convert it to a Roth IRA in Nov. 2024. We just found out from the client that his business is not going to be reporting any income for 2024, so he couldn’t make the IRA contribution to begin with. Any idea on how to fix this? I don’t believe he can recharacterize the Roth Conversion. Does he just withdraw the Roth conversion and pay taxes/penalties on any gains?
Permalink Submitted by Alan - IRA critic on Fri, 2025-02-21 21:22
Correction of this is messy since conversions can no longer be recharacterized. He should explain to the Roth custodian that he converted an excess IRA contribution because he lacked taxable compensation. The amount converted should be treated as an excess regular Roth IRA contribution and returned with adjustment for gain or loss.
Any gain with the returned contribution will be taxable on the 2024 return, so this should be corrected before filing.