ROTH IRA Contribution Reversal
Someone contributed to their ROTH IRA for 2021 (February 2022) and their accountant told them due to their recent marriage in 2021 they cannot contribute to the ROTH due to income limits. What is best way to unwind this contribution and will there be any penalty. They have not filed their return yet for 2021.
Permalink Submitted by Alan - IRA critic on Mon, 2022-03-21 16:39
If they do NOT have any non Roth IRA balance (Traditional, SEP, or SIMPLE IRA), they can recharacterize the Roth contribution as a TIRA contribution, and then immediately convert the TIRA to a Roth IRA. They still end up with a Roth contribution by conversion. There probably is little or no gain on the recharacterized Roth contribution, but if there was, the amount of gain will be taxable, but not until the 2022 return is filed. This strategy is known as the back door Roth. Each spouse can do this separately from the other.
Now suppose a spouse does have a rollover IRA or other pre tax IRA. In that case the conversion of the recharacterized contribution will be mostly taxable, so the spouse might instead just request a return of the 2021 contribution adjusted for gain or loss. Any gain would be taxable and subject to penalty on the 2022 return.
Finally, when the 2021 return is filed, it should include an explanatory statement about the date and amount of the Roth contribution, and what was done with it (either removal or recharacterization), so the IRS will know that there is no excess Roth contribution. These options apply separately to each spouse.
Permalink Submitted by David Berdow on Mon, 2022-03-21 17:12
If the spouse is covered by an employer plan both thrift savings plan and pension are there any limits. He is not covered by an employer plan.
Permalink Submitted by Alan - IRA critic on Mon, 2022-03-21 17:33
Being covered by an employer plan by either spouse just means that if income is too high for a Roth contribution it is also too high to deduct a TIRA contribution. I had assumed that the TIRA contribution would be non deductible, and that is what makes a back door Roth conversion non taxable. The spouse that made the 2021 Roth contribution and recharacterizes would file an 8606 with their 2021 return showing the recharacterized contribution as non deductible. Then they could make a 2022 non deductible contribution as well and then convert them both as long as they have no pre tax TIRA balance.
Permalink Submitted by David Berdow on Mon, 2022-03-21 17:40
Thank you