Roth Excess Contributions

Submitted by Krista McBeath on Tue, 2021-04-13 17:11

I’ve read through older topics, but am a bit confused. I’m working with a new client who has a mess. He contributed to a Roth IRA in/and for tax years 2019, 2020, and so far in 2021. He does not qualify based on income. T. Rowe suggested that he recharacterize.

I believe he has until 10/15/ 2021 (at least) to characterize for 2020. And he still has time for 2021 contributions. Is this correct? So, can he recharacterize to a non-deductible traditional IRA?

My concern with this idea is that he wants to begin using the back door Roth. I am afraid the recharacterization into non-deductible IRA, plus the growth, creates an issue for the back door. Am I making this to complicated? Can this work?

Then, what are his options for the 2019 excess?



Submitted by Alan - IRA critic on Tue, 2021-04-13 19:31

It can work if client has no other pre tax IRA balances that would make the conversions mostly taxable. The 2020 and 2021 excess contributions can be recharacterized. A 2020 8606 needs to be filed to report that year’s non deductible contribution. The conversion of these recharacterized contributions would be done right after the recharcterizations, and would be reportable along with the 2021 ND contribution on a 2021 8606. Earnings generated on these Roth contributions would be part of the recharacterization, so when the conversion is done any earnings will be taxable as part of the 2021 conversion. Now, if there are other pre tax IRA balances, this gets more complicated, so please advise if that is the case since that triggers other options. In other words, the recharacterization itself is not a problem, but the existence of any other non Roth IRAs is.
As you know 2019 can no longer be recharacterized. A 6% excise tax will be due on a 2019 5329, and also for 2020. The 2019 excess, but no earnings needs to be distributed from the Roth. This distribution must be reported on the same 2021 8606 as the conversion above. This distribution is a return of a regular Roth contribution so should not be taxable. A final 2021 5329 must still be filed showing this distribution of the 2019 excess, but no excise tax will be due for 2021.

Submitted by Krista McBeath on Tue, 2021-04-13 20:34

Ok.  He does not have any other pre-tax account.  One question, under your second bullet point, why does he have to file a 5329 for 2020 and pay a 6% excise tax when he will recharacterize 2020?  Is it because it isn’t corrected until 2021?

Submitted by Alan - IRA critic on Tue, 2021-04-13 21:20

No. The 2020 excise tax is from the 2019 excess which remained in the Roth at the end of 2020. It is not on the 2020 excess which is being removed by the due date. Note that because the 2019 excess has incurred excise taxes, a trade off is that the gains on that contribution remain in the Roth.  Compare that to the gains on the recharcterized contributions, which are transferred into the TIRA, and then are taxed when converted back to Roth in the back door process. 

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