Excess contributions to IRA were converted to Roth
I made excess contributions to my existing traditional IRA in 2023. Then I made multiple conversions to Roth in 2023 so traditional IRA balance was zero at end of 2023. I won’t have qualifying income for 2023 or 2024 so correction needs to be withdrawal. Traditional IRA and Roth at same custodian. I presume it is a two step process.
Step 1: Calculate the earnings on the excess contribution in the traditional IRA to determine disallowed conversion amount.
Step 2: Use disallowed amount to calculate associated Roth IRA earnings and then distribute disallowed amount plus associated Roth earnings from the Roth IRA.
Is this correct? Will the custodian be responsible/willing to complete the calculations or will I need to calculate and instruct the amounts to the custodian?
My understanding is the 6% excise tax can be avoided if the corrective distribution is made by the 2023 tax filing deadline, correct? And if done then, only the associated earnings would be taxable for 2023? Does this include the associated earnings from both the traditional IRA and Roth IRA? I am over age 59 1/2 and have another Roth IRA older than five years, if that matters.
Thank you for input
Permalink Submitted by Alan - IRA critic on Mon, 2024-03-04 20:59
Hopefully, you have not yet filed your 2023 return. Since conversions can no longer be recharacterized, the only solution is to process the corrective return of excess from the Roth IRA. You should NOT deduct the excess contribution on your 2023 return, but should report it as non deductible on Form 8606, the same form used to report the conversion and therefore the taxable amount of the conversion will be reduced by the amount of the excess contribution.
Most custodians will calculate the earnings/loss on the excess with software, and they are allowed to include or disregard any gain or loss in the TIRA while doing so. Of course, it is more accurate to calculate the gain or loss in both accounts, and since only one custodian is involved they should not have to ask you for any data from the TIRA custodian. If any gains are returned from the Roth IRA, they are taxable in 2023.
Permalink Submitted by J Sampson on Tue, 2024-03-05 18:53
Thank you for speedy response. I have not yet filed 2023 return. I was able to contact the “flagship” custodian and docusign a withdrawal form that will be processed today from the Roth IRA so I have the excess earnings amount to add to 2023 income. I get what you’re saying about not deducting the contribution but making sure to add in Form 8606 for basis. Hopefully I’ll get all amounts entered correctly for 2023 tax return since I won’t see the 1099R until next year.Thanks for sharing your good knowledge in this forum