2019 Ira Contrib. was Converted in 2020 and now everything must be reversed. HELP!!!!!!!!

Submitted by Michael Ball on Tue, 2020-09-15 19:18

Client made a Deductible IRA Contributions in 2019 for the full $7,000 each for him and spouse.
Client Converted these two IRA’s in full in 2020 over to a Roth IRA
Client filed extension of 2019 taxes due on Oct 15, 2020.
Client is going to have negative income for 2019 so 2019 IRA Contribution must be removed in full as excess contribution
HOWEVER, as stated above it was already converted to a ROTH.

How do we “Double Back” Roth Conversions are no longer recharachterizable so this really throws a wrench into the situation.

HELP!!!!!!!!!!!!!!!!!!



Submitted by Alan - IRA critic on Tue, 2020-09-15 22:20

  • Does client and spouse have any other TIRA accounts, and will they have at least 14k of earned income in 2020?  If these conversions have large gains, they could pay the 2019 excise taxes, and assign the contributions to 2020 on a 2019 5329. The conversion could then remain intact. They would have to not claim a deduction on their 2019 return and file 8606 forms to report non deductible contributions. 
  • Otherwise, if the conversions did not make enough to offset the 2019 excise tax, the 7000 for each spouse plus any earnings on the TIRA contribution plus any earnings on the conversion would have to be treated as an excess regular Roth IRA Contribution for 2019, and if a corrective distribution was taken by 10/15, there would be no excise tax, but the earnings distributed would be subject to tax and possibly 10% penalty on the 2019 return, the year of the excess contribution.  It may be a hassle getting the Roth custodian to understand why the conversion needs to be treated as an excess regular Roth contribution.

Submitted by Michael Ball on Wed, 2020-09-16 23:59

There is currently no other IRA accounts.  This 2019 contrib of 14k was a one-off as income was expected to be high that year but loss of a huge account and additional large expenses created a negative tax return. Not noticed before the IRA to Roth conversions were made in early 2020.  There may not be 14k of earned income in 2020 due to Covid shutdown.   If they declare non-ded contribs on 8606 for 2019 will they have been eligible for conversion? Or are we deep in gray area here?  Plus then we are contributing and converting in the same tax year. Doesn’t look good. I think it is best to take everything out and walk it all backwards. Taxes have not yet been filed for 10/15 so we have time. Another wrench is that custodians changed in 2020 AFTER the conversion was done at the old custodians. (which was direct at mutual fund companies). These funds that were direct were then moved over to clients existing TD Ameritrade Roth account after having been converted so we would be dealing with TD now and they don’t know what as done prior even though the exact mutual funds didn’t change. Only the custodians did.  Just curious how then can be a regular excess ROTH conversion for 2019 when they didn’t become Roth until 2020 or is that just how it is done? Why is it not an excess IRA contribution? I’m thinking because of the fact that Roth conversions can no longer be recharachtized that it must be done this way. This must be an issue that comes up –  just not that often.  

Submitted by Michael Ball on Thu, 2020-09-17 00:00

Permalink, I forgot to thank you and I do thankyouverymuch!

Submitted by Alan - IRA critic on Thu, 2020-09-17 00:53

  • Since they apparently will have no taxable income in 2019, the return of the excess contributions will probably not produce any tax, just the 10% penalty on any earnings on the contributions. Assigning the contributions to 2020 and incurring the $420 excise tax each for 2019 will cost more than just having the excess contributions returned by 10/15. Again, any gains on the contributions will be taxable in 2019, but with no taxable income there would be no taxes due.
  • The problem here is that the new Roth custodian would have to be convinced why the conversion was ineligible since they would have to treat it as an excess regular Roth IRA contribution. Conversion of excess contributions is technically a “failed conversion”. Since these can no longer be recharacterized, they must be removed as it they were excess regular Roth IRA contribution.
  • So the choices are the costly excise taxes with an easier filing vs the less costly but possible complex and messy removal of excess Roth contributions using the current custodian who was not part of the process. 

Submitted by Michael Ball on Tue, 2020-09-22 08:09

So  More information.  They do have TAXABLE income for 2019 and substantial taxable income of over $340k for cashing out a Bene-IRA in full. They just have no EARNED income thus the need for fixing this mess. So taxable income would be the 340k, the $14,000 contribution for 2019 is currently worth $19,340 for a gain of $5340.  Husband is under 59 1/2  Wife is 62.  (Read-gain pulled out taxed at top marginal bracket)2020 IS actually expected to have earned income once again after all of at least 14kWhat would be your recommendation given this information? Thank you!

Submitted by William Tuttle on Tue, 2020-09-22 11:52

  • “If these conversions have large gains, they could pay the 2019 excise taxes, and assign the contributions to 2020 on a 2019 5329. The conversion could then remain intact. They would have to not claim a deduction on their 2019 return and file 8606 forms to report non deductible contributions.”
  • They will also have to file 2020 Form 5329s reconciling the 2019 excess contribution balances with available 2020 contribution space.
  • This assumes they did not also make 2020 contributions and have the full contribution space available.

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