Excess Roth Contrib – Back Door Solution?

Submitted by Jeff Ewing on Mon, 2019-09-23 05:38

Hi, I have a new client who has been contributing to a Roth account for the past few years even though their income prohibited this. Because of the client’s income levels and the spouse being covered by a 401k plan at work, any TIRA contribution would be nondeductible.

The tentative plan is first to recharacterize the 2018 Roth contribution as nondeductible TIRA, then amend the 2018 return and pick up any earnings from the 2018 contribution, and also include forms 5329 and 8606.

My understanding is that at this point, only the 2018 contributions could be recharacterized (until 10/15/19). If so, the only way to really “fix” the prior years’ excess contributions is to withdraw the excess contributions, right? For purposes of discussion, let’s say the amount of the excess Roth contributions (not including 2018) is $20,000. Taxpayers don’t have any traditional IRAs, just the Roth. Since the Roth contributions are all after-tax, withdrawing the excess contributions is not a taxable event, correct? If that is the case, could all of the $20,000 of excess contributions be withdrawn in 2019, contributed as non-deductible TIRA, and then converted back via a backdoor Roth? And since all IRA contributions were made after-tax, there’s no tax on the conversion is there?

While we’re at it, could the excess contribution for 2018 (which will be recharacterized as a non-deductible TIRA contribution) also be converted via a backdoor Roth?

Granted, there’s a handful of 5329s to file on account of the years of excess Roth contributions sitting in the account with a decent amount of excise tax, but would this course of action effectively get most of the money back into a Roth as the client had originally intended? Any insight would be appreciated, especially if I am overlooking something.



Submitted by Jeff Ewing on Mon, 2019-09-23 14:43

I think I answered part of my own question. I forgot about the contribution limits on nondeductible TIRAs.

Submitted by Alan - IRA critic on Mon, 2019-09-23 17:13

  • I would approach this in the following order ———-Recharacterize the 2018 Roth contribution as a TIRA contribution (also the 2019 contribution if one was made).  Deadline to recharacterize 2018 is 10/15/19.
  • Convert the TIRA balance – taxes will only be due on the amount this balance exceeds the non deductible contributions allowed for these two years. A 2018 8606 can be filed by itself to document the 2018 non deductible contribution. Conversion and Form 8606 to report non deductible contribution for 2019 will be included on 2019 1040. Form 8606 will also report the Roth distribution in Part III, but there should be no tax due since the distribution should come from regular Roth contributions as you indicated.
  • Request a distribution of the total of disallowed Roth contributions through 2017. These must be withdrawn without earnings (any earnings on these stay in the Roth ). This must be done before year end to avoid a 2019 excise tax, but 2019 5329 will still be needed to show that the excess has been eliminated. This distribution cannot be rolled over, but could be used as a source of funding for the 2019 ND TIRA contribution.
  • Starting with the first excess year, Form 5329 will have to be filed to pay the 6% excise tax. These amounts will grow each year because they accumulate until either applied or withdrawn.  Any of these cannot be applied as TIRA contributions, but the recharacterizations of 2018 or 2019 will essentially treat those contributions as TIRA contributions. 
  • If the balance in all Roth IRAs is not sufficient (due to other withdrawals or losses) to match the total excess amount remaining, please advise.

Submitted by Jeff Ewing on Tue, 2019-09-24 04:51

Thank you, Alan. This is extremely helpful. Between earnings and contributions made in earlier years (before becoming ineligible), the Roth has sufficient balance to withdraw all of the excess contributions.

Submitted by Jeff Ewing on Tue, 2019-09-24 15:56

If the 2018 Roth contribution is being recharacterized as TIRA prior to the 10/15/19 deadline, is it considered to be an excess contribution for purposes of the 2018 5329? I would think not—even though the 2018 Roth contributions were in the account at 12/31/2018, because of the recharacterization provision, it is as if they were contributed as ND TIRA the whole time. Therefore, the 2018 5329 would only report the cumulative amount of excess contributions from 2017 and earlier. Is my understanding correct?Thanks.

Submitted by Alan - IRA critic on Tue, 2019-09-24 16:01

Yes, your understanding is correct.

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