Removing excess 2021 Roth IRA contribution

Submitted by Travis Tsukayama on Thu, 2022-09-15 20:02

Will be meeting with a new client this week. Husband and wife in their 60s. They each made monthly contributions to their Roth IRAs in 2021, and have now discovered their income exceeded the contribution threshold to a complete phaseout of eligibility. Their CPA recommends a removal of excess contribution via recharacterizing the excess contribution to a traditional IRA. There are two areas of confusion that I am unsure about:

1) The couple is self-employed and have a SEP IRA for the business. Are they able to recharacterize their excess Roth contribution into the SEP IRA, instead of a brand new traditional IRA? As a follow up question, if they have an active SEP IRA are they able to deduct the amount of the recharacterization if its moved into a traditional IRA?

2) Regarding the calculation of “earnings” on the excess contribution. Since the contributions were made monthly, the earnings to be removed must be calculated for each month? Or can the calculation be done by looking at balances after the first contribution and final one for the year. This is not something the previous custodian is willing to take action on, so we will be doing the earnings calculations ourselves. Thank you for any insight that can be provided.



Submitted by Alan - IRA critic on Thu, 2022-09-15 20:50

  1. A SEP contribution is an employer contribution and a Roth contribution is a personal contribution, therefore it is not possible to recharacterize between these contribution types in either direction. 
  2. Since all of the periodic contributions are excess, the computation period begins with the date of the first contribution, and all contributions are added to determine the adjusted opening balance per IRS Reg 1.408-11. Custodians will not perform a separate calculation for each contribution. Since the computation of gain of gain or loss is simplified by this Reg. by treating these contributions as if the first contribution was a one time total contribution, it is surprising that the custodian will not undertake it. You just need to determine the actual opening balance to include all the contributions, and the closing balance just before the corrective distribution to determine the amount of gain (2021 should generate a gain) that is either recharacterized as a TIRA contribution which would likely not be deductible or distributed with the excess contribution, in which the gain would be taxable on the 2021 return or amended 2021 return.

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