IRA Recharacterization

Submitted by Robert Smith on Fri, 2023-03-17 20:03

A $1,500 non-deductible contribution to a traditional IRA and $3,500 to a Roth IRA in March 2022 for 2021. The $1,500 was converted to the Roth IRA in April 2022. The contributions should have been reversed with $1,500 going to the Roth due to the income limitation. And the $3,500 to the traditional IRA would have been converted. Is there a way to correct this?



Submitted by Alan - IRA critic on Fri, 2023-03-17 23:34

  • Yes, but it will be more painful now that the recharacterization deadline has passed. The 1500 ND contribution and conversion portion is OK, but there is now a 2000 excess Roth contribution for 2021.
  • Form 5329 for 2021 with a 1040X must be filed to report and pay the 6% excise tax on excess ($120).
  • A 5329 must also be filed with the 2022 return, and if the excess from 2021 can be “absorbed” as a 2022 Roth contribution, there will be no 2022 excise tax. But if not, there will also be a 6% excise tax for 2022, and the 2000 will have to be distributed before the end of 2023 (or absorbed in 2023) prior to the end of 2023 to avoid a 3rd year of the excise tax. This is all done on Form 5329 without any involvement of the Roth custodian other than issuing the 2000 distribution if necessary.


Submitted by Robert Smith on Tue, 2023-03-21 18:20

The $2,000 excess contribution is at a loss.  How is that handled?  State (Illinois) taxes are not an issue, correct?



Submitted by Alan - IRA critic on Tue, 2023-03-21 18:57

Gain or loss does not matter after the recharacterization deadline. To eliminate the excess by distribution, $2,000 must be distributed. The distribution should be non taxable as it is likely coming from the balance of regular Roth contributions. I think that IL follows federal rules with respect to Roth IRA distributions.



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