IRA recharacterization resulted in $6000+ contribution in a year for traditional IRA account. What should I do?
I meant to do a $6000 contribution to my traditional IRA account. It was initially done to roth IRA by mistake. So I have to request a recharacterization, which took days to complete. When it was completed, due to the earnings in the roth IRA account, $6123 was moved to my traditional IRA account. I am under 50 so the annual limit is $6000. What are my options?
1) Can I treat the additional $123 as ineligible transfer and do a removal-of-excess form?
2) Can I carry forward the $123 and only contribute $5877 next year? I will pay the 6% excess contribution penalty for the $123 for a year I guess? In this case, can I proceed with move the whole amount ($123) to via back door roth cconversion?
What will be the pros and cons for each options?
Thank you so much for your suggestion and advice!
Permalink Submitted by Alan - IRA critic on Fri, 2021-07-09 23:44
No need to remove any funds. You are not treated as if you had made a 6000 TIRA contribution, but it may or may not be deductible. If not, you will have to file an 8606 to report a non deductible TIRA contribution.
You can contribute the full amount next year. The $123 is just treated as a gain on your contribution. It does not affect your contribution limit in any way. If you are doing a back door Roth and your TIRA contribution is non deductible, when you convert (usually the total current balance), you will owe tax on the amount of gain on your contribution, whatever it happens to be when you convert to Roth. There is no penalty due and no withdrawal necessary, since there is no excess contribution.
Permalink Submitted by Sheila Zhou on Sun, 2021-07-11 05:51
You answers are greatly appreciated!This was a contribution made this year for 2020 and I have filed my tax extension… The TIRA contribution is non deductible and I am planning to convert the whole amount ($6123) to Roth – this month. Can I get a clarification on tax filing –
for 2020 tax return, I only need to file an 8606 to report a non deductible ITRA contribution in the amount of 6000 (and an statement on the recharacterization?)
for 2021 tax return, I need to file an 8606 to report the conversion and report the tax amount as well
Does that sound right?Thank you so much!!!