How to unwind non-deductible Roth

Submitted by Bro Has on Tue, 2017-04-04 16:00

We have been following a non-deductible Roth strategy. Contribute $6500 to a Traditional IRA but get no tax deduction. Then convert a few months later to a Roth at almost no tax liability.

Did this in 2016, the year 70.5, when you cannot make IRA contributions.

How do we unwind this because two steps and gains are involved. Of course, this happened in February 2016 when the market was very low and so now the contribution has grown substantially.

I think the necessary steps start like this…
1 – pull the $6500 out of the Roth back to the Trad IRA
2 – pull the $6500 out of the Trad IRA (or should we skip this and go direct from Roth back to joint/taxable?)
3 – pay 6% penalty on contribution that should not have been made (6500 x 0.6 = $390)

Lets say the $6500 grew by 20% since Feb 2016, which is $1300. How does the excess gain factored?

Any corrections or guidance on the gain? Thanks for your help!



Submitted by Alan - IRA critic on Tue, 2017-04-04 17:11

  • Yes, request that your conversion be recharacterized (deadline is 10/15/2017 if you have filed your 2016 return on time or requested an extension). Then request a return of your 2016 TIRA contribution with allocated earnings. The earnings returned will be taxable on your 2016 return because the contribution was made in 2016. Since you will have removed the excess TIRA contribution by the deadline, you will not incur the 6% excise tax, but you will have to report the 7800 on line 15a and 1300 on line 15b (taxable amount) of your 2016 return.
  • Before doing this be sure that your 6500 contribution was not for 2015, since if you reached 70.5 in 2016 you can still make a 2015 contribution in 2016 that would be OK.
  • If you have not yet filed your 2016 return, you might want to file an extension to be sure that you meet the deadline. Remember that to qualify for the 10/15 deadline you must either file by 4/18 or file an extension. Your 2016 return should also include an explanatory statement regarding the contribution, conversion, recharacterized conversion, and return of excess contribution (dates and amounts). If you have already filed for 2016, you will need to amend your return.


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