Backdoor Roth Mistake – Recharacterization instead of Conversion
I contributed the maximum $6,000 to an empty Traditional IRA account in November 2021 with the intention of doing a backdoor Roth. Somehow I filled out the wrong form – instead of the conversion/rollover form I ended up submitting a recharacterization form when moving the $6,000 from TIRA to Roth. Now the 1099-R is showing code N. The financial institution will not to change the recharacterization to a rollover. What is my option to avoid taxes/penalty because my income is over the limit to contribute to Roth? I assume the recharacterization cannot be undone (recharacterized back to TIRA)? Can I withdraw the $6,000 from the Roth claiming excess contribution?
Permalink Submitted by Alan - IRA critic on Fri, 2022-04-08 14:08
Correct. A recharacterization cannot be reversed. However, you can still request the return (with any gains) of your contribution which is now considered a regular Roth contribution. If there is a gain included, that gain will be taxable and subject to penalty on your 2021 return because you made the contribution in 2021. If there is no time to complete the returned contribution before 4/18 you can still make a new TIRA contribution by that deadline date for 2021. You would then convert the new TIRA contribution which I presume will not be deductible. You should include an explanatory statement regarding the recharacterization and returned Roth contribution with your 2021 return so the IRS will know that you no longer have a 2021 excess Roth contribution. Finally, note that you will have to either file your 2021 return OR file an extension by the 4/18 due date to be entitled to have the Roth contribution returned by 10/17 (the extended due date). Otherwise, the returned contribution must be processed by 4/18, so time is an issue now since your first deadline is only 9 days away.
Permalink Submitted by Ayke Blackburn on Tue, 2022-04-12 01:54
Thank you for your response. I have filed for extension and now in the process of trying to withdraw the contribution. I have a follow up question re: calculating the earnings. The $6000 I contributed is still in cash, which may have earned pennies in the last few months. However, the rest of the balance of the ROTH account is in stocks, which may have lost value since November 2021. Do I withdraw the $6000 + $0 earnings, or do I need to withdraw less by multiplying the $6000 with ACB-AOB/AOB?
Permalink Submitted by Alan - IRA critic on Tue, 2022-04-12 04:15
The custodian’s software will calcalute the earnings or loss based on IRS formula. The investment of the actual contribution does not matter since the gain or loss is based on the entire account from the date of contribution to the date the contribution is returned. Your case is somewhat unique because your gain or loss includes the amount of gain or loss included in the recharacterization plus the gain or loss since the recharacterization. You already know the gain or loss prior to the recharacterization by the amount the transfer varied from the 6000 contribution. There is a good chance that you now have a loss on the contribution, which would result in a distribution under 6000 and therefore no gain to be subject to tax or penalty.