excess Roth contribution: Form 8606 line 6

Submitted by Michael Djupstrom on Thu, 2023-03-09 06:19

Hello,

I’ve been making annual contributions to a Roth IRA for several years, and I’ve just realized my MAGI is too high for this in 2022, so I’m planning to recharacterize a $6,000 May 2022 contribution to a traditional IRA next week, and then convert it into the Roth again (“back door Roth”).

Complicating the situation is the fact that in January 2022, I also converted $5,965 from a pre-tax traditional IRA to my Roth, leaving the former empty. But because my planned recharacterization will cause me to have an official balance in my traditional IRA at the end of 2022, I need to fill out Part I of Form 8606 in order to calculate the pro-rata taxable portion of the Jan. 2022 conversion.

For the amount to enter on line 6 (the end-of-2022 value of the to-be-recharacterized May 2022 contribution, still currently sitting in the Roth), can I simply use the IRS’s Net Income Attributable formula, where the ACB would be the total value of my Roth on 12/31/22 and the AOB its value immediately preceding the May contribution plus the $6,000 itself? It looks like the NIA formula is normally used for calculating the total to be removed from a Roth IRA after an excess contribution, but it seems that it would work here, too. Am I correct?

Rounding figures off, my ACB is 72,000 (Roth on 12/31/22) and the AOB is 74,000 (Roth on 5/16/22), giving me:

NIA = 6,000 * [(72,000-74,000)/74,000] = -162.16

This gives me 5,837.84 for Line 6 (i.e. a slight loss in value from May 2022 to the end of the year).

I believe my Roth administrator will calculate NIA for the recharacterization, but it won’t provide any values for the end of 2022, so I need to figure this out myself. Any guidance would be very much appreciated! Thanks.



Submitted by David Mertz on Thu, 2023-03-09 12:20

  • Add to the original year-end balance the actual amount transferred in the recharacterization, not a theoretical amount that would have been transferred had the recharacterization occurred on 12/31.
  • Although the context is different, outstanding recharacterizations are addressed in CFR 1.408-8 Q&A-8(b).  It says, “If an amount is contributed to a Roth IRA […] and that amount (plus net income allocable to that amount) is transferred to another IRA (transferee IRA) in a subsequent year as a recharacterized contribution, the recharacterized contribution (plus allocable net income) must be added to the December 31 account balance of the transferee IRA […].”

Submitted by Michael Djupstrom on Thu, 2023-03-09 17:28

  • Thanks for this reply. To me, it appears the paragraph in CFR 1.408-8 Q&A-8(b) is giving guidance on calculating RMD for the year in which the recharacterization actually occurred (2023 in my case), rather than how to figure pro-rata taxable amounts for a 2022 rollover.  Aren’t these entirely different situations?
  • Also, does it matter that the […] parts quoted above refer to a contribution “to a Roth IRA that is a conversion contribution or failed conversion contribution”,  whereas my excess Roth contribution was not a conversion?
  •  Incidentally, the Roth has performed well since 12/31/22, so using the amount actually transferred in the recharacterization instead of the year-end value would result in a higher nontaxable portion of my Jan. 2022 rollover, which is certainly nice, but I don’t want to screw this up. It’s my first time dealing with this form. Thanks again for your feedback.

Submitted by David Mertz on Fri, 2023-03-10 02:45

  • Regarding CFR 1.408-8 Q&A-8(b), yes, that’s why I indicated that the context is different.  But the concept is the same and produces the same need to adjust the year-end balance.  There is no reason to expect that the IRS would require an adjustment based on a theoretical December 31 recharacterization in one case and not the other.
  • No, it doesn’t matter.  The process of recharacterizing is the same in each case.   (Of course, recharacterizations of Roth conversions are no longer permitted.)
  • The IRS does not seem to have a reputation for caring too much about how basis is applied.  For example, the IRS has never provided guidance on what to use for the year-end value when an annuitized IRA is involved.

Submitted by Michael Djupstrom on Fri, 2023-03-10 16:15

Thank you so much for your guidance.  If only the IRS instruction-writers had your ability to explain things so concisely and logically!

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