excess Roth contributions 2017 and 2018
Client made $5,500 contributions in April 2018 (for 2017) and August 2018 (for 2018) into her Roth IRT, signing forms indicating that she was eligible to make contributions for each year. Turns out she was ineligible for both years; she had intended to contribute to her Traditional and do back-door conversions.
For the 2017 excess contribution, assuming she chooses to remove the excess in 2019, is there a 6% penalty tax for 2018?
For the 2018 excess, can she recharacterize it to her Traditional instead of removing the excess? If no, can she remove the excess and make a contribution to her Traditional for 2018 by the April 15 deadline?
Permalink Submitted by Alan - IRA critic on Thu, 2019-03-28 17:42
The 2017 excess has now incurred the 6% excise tax for both 2017 and 2018, reported on a 5329 for each year. Client needs to withdraw it (without earnings) before year end to avoid another excise tax for 2019. The 2018 contribution could be recharacterized as a TIRA contribution (probably non deductible) although a conversion back to Roth is subject to the pro rata rules since it sounds like she might already have a pre tax balance in her TIRA. If she does not and converts after recharacterization, any gains on that contribution will be taxable. If the mostly taxable conversion is not desirable, she could just remove the contribution with earnings. If she has earnings and removes them, they will be taxable for 2018 and she would have to amend 2018 if she has already filed. If there is a loss on the 2018 excess, she could have the contribution returned and there would be no taxable earnings for 2018, and she could still make a new 2018 contribution to a TIRA by 4/15, and report it as non deductible on Form 8606. Given all these options, it is helpful to know whether she has already filed 2018 or not, whether there is a gain or loss on the 2018 excess contribution, and whether there is a pre tax TIRA amount in her TIRA that would affect a conversion.