Roth Contribution reversal
Have a client (65) and spouse (53) that made 2021 Roth IRA contribution ($7k each) in 8/2021. They also made $7k contributions in 2/2022 for 2022. Their CPA just let them know that their MAGI is too high to be eligible for Roth Contributions in 2021 and income is expected to be the same or higher in 2022. This being known now, they need to reverse their contributions. They would like to bring the $14k each back into their NQ checking account.
There is losses, not gains in the account due to recent market movement. Can we just instruct them to pull the funds out of the Roth. Are there different considerations for their ages (her under 59.5). They just opened their Roth’s in 2021 so the 5 year has not been met. Our thought is with the loss, they can just distribute out with no issues/penalty. If that is the case, do we need to be aware of any tax forms that may need to be filed?
Thanks for the help!
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-10 15:12
Instead of requesting that the contributions be returned net of losses, if a particular spouse does not have any pre tax IRA balance, they could recharacterize their regular Roth contributions as non deductible TIRA contributions and then convert that balance to a Roth IRA. This is referred to as a back door Roth and would effectively replace their Roth contribution for applicable spouse, although the 5 year clock would not start until 2022.
Otherwise, they would request the specific return of their 2021 and 2022 contributions, ahd the custodian will calculate the net loss and return the net figure, which will be less than 14k each. They will each get a 1099R reflecting the returned contribution, but there will be no taxable earnings due to the loss. And if something reduces their MAGI for 2022 before year end, they still have until 4/15/2023 to make a new 2022 Roth contribution to replace the withdrawn contribution.