2020 Backdoor Over Contribution
Have a client who made non-deductible contributions twice for 2020 , then converted to a Roth. First was 8/2020, second was 1/2021 for 2020. He wrote on the checks 2020, and the custodian marked them both as 2020 contributions. The custodian cannot fix by reclassifying the 2nd contribution because it’s too late.
Next, he made a 2021 non-deductible contribution in 2021 (12/2021), and converted that (12/2021).
I believe our best approach is to undo the conversion/contribution that was done 12/2021, and ensure that his tax returns reflect(ed) one contribution in 2020, one in 2021, and the conversion.
My question is does that make sense, or is there a different approach that should be taken. Looking to point the tax preparer in the right direction.
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-06 01:22
That won’t work because the IRS already holds 5498 contribution reports of two contributions. The second conversion (1/21) was a failed conversion if client had no other TIRA balance at the time other than the balance that was converted because the conversion was then funded by an excess TIRA contribution. A failed conversion is not reportable as a conversion, it must be reported as a non converted distribution and removed from the Roth IRA by treating it as an excess 2021 regular Roth contribution. The 12/21 ND contribution and conversion is allowable.
This is not all that costly, but it does create a filing nightmare because reporting cannot simply follow the 1099R Forms issued. A 2020 Form 5329 must be filed with a 1040X to pay the 6% excise tax on the excess contribution. The 1/21 TIRA distribution reported on Form 8606 and a 2021 5329 will cure the excess 2020 contribution by the distribution method and there will be no 2021 excise tax. Finally, the excess 2021 Roth contribution can still be removed with earnings (taxable on 2021 return because the excess Roth contribution was made in 2021) with the deadline to complete this being 10/15/2022, but only if the 2021 return is either filed or an extension filed by 4/18/2022. At this time filing an extension will likely be required.
So the net result of the above is a 2020 and 2021 ND contribution being converted. The returned excess contribution from the Roth IRA can be used to fund the 2022 ND contribution. Tax costs will be the 2020 Form 5329 excise tax of 6%, ordinary income tax and penalty on any earnings returned from the excess regular Roth contribution, and any added filing costs charged by the tax preparer who will quite likely have challenges following all this.
If the 2021 return was already filed, the excess Roth contribution can still be removed through 10/15, but the 2021 return will have to be amended. Care should be taken that the Form 8606 forms are correctly completed to conform to the recommended actions.