Exess Roth Contributions
I have a client who made contributions to a Roth without taking into consideration his income for 2010, and therefore due to his income was ineligible to make a Roth contribution. He has already chosen to recharacterize his Roth to a non-deductible IRA. What will his tax consequences/penalty be for this recharacterization?
Thank You
Permalink Submitted by Alan Spross on Wed, 2011-04-06 22:18
No tax consequences, except that he fill have to file Form 8606 to report the non deductible TIRA contribution. He should also attach an explanatory statement explaining the amount of the Roth contribution, the amount recharacterized, the value of the amount transferred to a TIRA upon recharacterization, and the dates.
If he is in the income phaseout range, he should retain the partial Roth contribution allowed and only recharacterize the amount that is in excess of the amount allowed as a Roth contribution. That keeps some of the earnings generated to date in the Roth IRA.
If he has no other TIRA accounts, he should then convert the non deductible TIRA contribution from the recharacterization, since the conversion will be tax free. If he has other TIRA balances, then the pro rate rules apply to determine how much of the conversion is taxable. The conversion would be a 2011 conversion.
Permalink Submitted by Donald Mathias on Thu, 2011-04-07 03:26
Thank you for the clarification.