Treatment of Earnings on Excess Roth Contribution
If I contributed $5,500 to a Roth which has subsequently grown to $6,000 and then realize my income is too high, how are earnings treated? My understanding is I could recharacterize the $5,500 contribution and $500 earnings into an IRA and then subsequently convert the money to a ROTH. In this situation would the $5,500 contribution and/or $500 earnings be taxable and/or have a penalty at any point?
Permalink Submitted by Alan - IRA critic on Thu, 2017-10-26 16:32
If you recharacterized your Roth contribution as a TIRA contribution, the full 6000 would be transferred to your TIRA. When you then converted back to Roth, the $500 would be taxable, but no penalty. Conversely, if you had the 5500 Roth contribution returned to you as an excess contribution, you would receive 6000 and the $500 in earnings would be both taxable and subject to penalty. You would also lose those gains from your IRA since if you then made a new TIRA contribution it could only be for 5500. Note that if you recharacterize and convert, the taxable amount is calculated using the balance of all your TIRAs. Therefore, if you have other TIRA amounts in addition to this contribution, your conversion would be mostly taxable. But if all you have is this particular recharacterized contribution, only 500 would be taxable when you converted the entire TIRA balance.