Roth Contribution Error Tax Help Needed

Submitted by Jared Howerton on Mon, 2016-02-22 14:38

My wife started a Roth IRA a couple years before we were married. When we got married in 2010, our AGI went over the phase out range to be able to directly contribute to a Roth. The problem is that neither one of us knew that we needed to start using the backdoor conversion method and contributions were made directly in error. I didn’t know it was an issue until a few months ago when I opened my own IRA. I know I just need to recharacterize her 2015 contributions over to a Traditional then convert it back, but how do I fix her 2010-14 direct Roth contributions that should have been back doored instead, since those deadlines have passed? The IRS has never said anything about improper method on our taxes.

Should I just fix 2015 and go on? I just don’t want them to hit me with some big penalty down the road.



Submitted by Alan - IRA critic on Mon, 2016-02-22 20:23

  • You are correct regarding recharacterizing her 2015 Roth contribution as a non deductible TIRA contribution, and you can then convert it back to the Roth. Or if the contribution has a significant loss you could request a return of the excess contribution and then make a new non deductible TIRA contribution in the full amount of 5500.
  • For the prior years, the exact amount of all her contributions should be distributed. This will not be taxable since they are Roth contributions, and any earnings get to remain in the Roth. The main problem is the 6% excise tax for each year which would be reported on a 1040X and 5329 starting with the oldes year. This could be expensive since the prior year excess carries over to the next year. Using an artibrary 5000 for 2010, this would start at 5000, go to 10,000 for 2011, 15,000 for 2012, 20,000 for 2013, 25,000 for 2014 and another 25,000 for 2015. Total of 100,000 @ 6% is 6,000. In addition, the IRS could bill late interest for late payment of the 2010-2014 excise taxes. There is no statute of limitations for excess contributions either, but it would have been nice had the IRS or any tax software program used to complete your return flagged this early on to eliminate this accumulated total.
  • Since the excise tax accrues on Jan 1, there is no rush to remove her balance before December so might as well let it generate some more Roth earnings for several months before taking out the distribution. But the 1040 X forms should and can be filed earlier to eliminate more possible interest charges. The distribution will be reported on an 8606 for 2016, but unless she has taken withdrawals already, there will be no tax due on the actual distributions.

 



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