Return of excess Question
Hello, I have a client who contributed to IRA and got bad tax advice and did a recharazation to a Roth IRA, but they were over Roth income limit so it is ineligible. They need to do a return of excess out of the Roth IRA but my custodian is saying since they already contributed to the traditional so they can’t put it back in the traditional. I don’t believe this is correct and I wanted to some thoughts on whether or not this return of excess would be in good order. Any help would be greatly appreciated.
Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2020-05-28 17:16
Once a given contribution is recharacterized, it cannot be recharacterized back and that is what the custodian is saying. Client now has an excess Roth IRA contribution which must be returned with allocated earnings. If there are earnings, the earnings will be taxable in the year in which the original TIRA contribution was made. Now if client still qualifies for a TIRA contribution they can make a new TIRA contribution using the funds that were returned from the Roth IRA, but if the client is covered by a workplace plan they will not be able to deduct the TIRA contribution. If this was a 2019 contribution, they have until 7/15 to make a new TIRA contribution for 2019. In other words, they cannot recharacterize the Roth excess back to the TIRA, but they CAN have the Roth excess returned and then make a new TIRA contribution.