Roth IRA contribution for 2018 – uh oh, not eligible

Submitted by Greg Syr on Thu, 2019-12-19 19:56

Hi,

I made a Roth IRA contribution for 2018 of $5,000. MAGI was > $210,000, so not eligible for a Roth.

The re-characterization was NOT done by 10/15/19.

What do I do now?

Thanks,
Curious Guy



Submitted by David Mertz on Thu, 2019-12-19 20:54

  • File 2018 Form 5329 reporting the excess Roth IRA contribution made for 2018 and pay the 6%, $300 excess contribution penalty.
  • If you are not certain that you will able to apply the excess carried in from 2018 as part of your Roth IRA contribution for 2019 to eliminate the excess, you’ll need to obtain a regular distribution of $5,000 from the Roth IRA before the end of 2019.  Any earnings on the $5,000 can remain in the Roth IRA.  A regular distribution after the due date of your 2018 tax return will not be taxable since it is a distribution of contribution basis and it eliminates the excess.  The regular distribution will be shown on 2019 Form 5329, eliminating the excess, and, if the distribution is not a qualified distribution, it will be reportable on 2019 Form 8606 Part III to show that the taxable amount of the distribution is $0.

Submitted by Greg Syr on Sat, 2019-12-21 01:01

Thank you for the reply.  

  • Let’s say I contributed $5,000 in the 2018 Roth. 
  • Let’s say it is now worth $6,000.
  • I plan to roll the 2018 contribution into a 2019 Roth IRA.   
  • I will roll $5,000 from the 2018 into a 2019 Roth.   Then I re-characterize the 2019 Roth.

 

  • What do I do with the $1,000 in earnings (growth from $5,000 to $6,000)?
  • Do I file the 5329 on the $1,000 or the $5,000?  
  • Do I send the 5329 in with my 2019 return or seperately?

Submitted by David Mertz on Sat, 2019-12-21 11:48

  • You are *not* permitted to recharacterize the $5,000 excess contribution for 2018 contribution that you apply as a 2019 contribution.  You are only permitted apply the $5,000 excess from 2018 as part of your 2019 Roth IRA contribution if you are presently eligible to make a $5,000 Roth IRA contribution for 2019.  If you are not presently eligible to make a 2019 Roth IRA contribution you must obtain a regular distribution of $5,000 from your Roth IRA before the end of 2019.
  • If you obtain a regular distribution of $5,000 you file 2018 Form 5329 reporting a $5,000 excess contribution and pay the $300 penalty.  You can file this stand-alone.
  • If the regular $5,000 distribution is not a qualified distribution you must also file 2019 Form 8606 Part III with your 2019 tax return to show that the taxable amount of the Roth IRA distribution is $0.
  • You file 2019 Form 5329 with your 2019 tax return reporting a $5,000 regular distribution that erases the excess carried in from 2018.

Submitted by Greg Syr on Sat, 2019-12-21 14:15

Great info.  Thanks so much. One point I am not clear on – you said “You are only permitted apply the $5,000 excess from 2018 as part of your 2019 Roth IRA contribution if you are presently eligible to make a $5,000 Roth IRA contribution for 2019.”

  • I want to roll the excess into a 2019 Roth, but I know that our MAGI is too high again this year.  I planned to perform a re-characterization with the 2019 Roth.  I don’t know if that makes me eligible for a 2019 Roth or not, per your comment.  Please explain.

Thanks!!! P.S.  How can I format my replies with breaks?  This formatting is a mess.

Submitted by David Mertz on Sun, 2019-12-22 14:51

  • Since your 2019 MAGI will be too high, you are not eligible to make a 2019 Roth IRA contribution.  To eliminate the excess carried in from 2018 you must obtain a regular distribution of $5,000 before the end of 2019, otherwise you will have another 6%, $300 early distribution penalty for 2019.  The deadline for recharacterizing your 2018 contribution was October 15, 2019 and we are now beyond that, so recharacterizing is no longer an option.
  • I don’t know how some people are able to format the paragraph breaks on this forum.  I am unable to do so, so like some others I use bullet points to separate paragraphs.

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