6% excise tax on IRA contributions above the annual limit
We utilized a Back Door Roth in 2021 by making the non dedcutcible contribution to a recently established traditional IRA and then within a day or two transferred those funds into a Roth IRA held by the same custodian.
The client’s CPA is asseritng that the non deductible IRA contribution is subject to the 6% excise tax on excess contributions. We believe because corrective action was taken to remove the excess contributions from the Traditional IRA and there was no income for the time period the funds resided in the traditional IRA the 6% excise tax does not apply.What are your thoughts on this?
Permalink Submitted by Alan - IRA critic on Wed, 2022-07-13 19:31
Why is the non deductible contribution an excess contribution? Only reason would be that you (or your spouse if filing jointly) do not have earned income equal to the contribution. If you do not have the earned income and you converted the excess contribution, the conversion does not correct the excess contribution. Instead, you now have an excess Roth IRA contribution, and the conversion must be treated as an excess regular Roth IRA contribution and removed from the Roth adjusted for gain or loss. Even if you do have an excess contribution, there is no 6% excise tax if you can complete the corrective distribution by 10/17. You have until 10/17 only if you either filed your 2021 return on time or filed a timely extension by 4/18.