Does it still count as withdrawl of excess contribtuion?

Submitted by Silvia Lam on Mon, 2023-03-20 17:00

My client converted the roth ira excess contribution to his traditional IRA account after finding out he was no longer eligible for roth ira contribution for this year’s tax filing . Then later he found out that his income also exceeded the tax deduction for the traditional IRA as well, so he decided to take the excess contribution out by transferring to his normal investment account. He accidentally transferred the amount back to the roth IRA account from the traditional IRA account, and now he finally removed that amount from roth IRA. Is there a way to document this incidents during the tax filing? So that IRS won’t take it as withdrawing money out prematurely from the roth IRA.



Submitted by Alan - IRA critic on Mon, 2023-03-20 19:17

These actions will require plenty of tax reporting. Were they all completed in 2022, and therefore he has all the 1099R forms?  Has the 2022 return been filed? For the final distribution, if done this year, he needs to check his Roth statement for a description. Most likely it was just an early Roth distribution which he will have to report on Form 8606, with taxes determining using the Roth ordering rules. If he has made prior regular Roth contribution, the distribution will come from the regular contribution balance, and therefore would be non taxable. But if there were no regular contributions and the distribution came from a conversion done in the last 5 years, he will owe the penalty on the taxable portion of the conversion it came from. Hopefully he has kept track of the composition of his Roth IRA so we will be able to report the Roth distribution on Form 8606.

Submitted by Silvia Lam on Mon, 2023-03-20 23:58

The actions were all completed in 2023. The 2022 return hasn’t been filed yet. The excess contribition was for the year of 2022, and I wonder what’s the best way of handling his situation. Excess contribution from roth IRA converted to traditional IRA (to avoid penality), then converted back to roth IRA, and then withdraw roth distribution.  The intent was to remove excess contribution, but i assumed that because the series of recharcterization, he could no longer claim that’s an act of removing excess contribution, Correct? So in this case, was the last step of roth distribution withdrawl considered a withdrawl for the tax year 2024? 

Submitted by Alan - IRA critic on Tue, 2023-03-21 04:09

  • The correct description of the first action is “recharacterization” as a TIRA contribution and that should be reflected on a 1099R for the Roth IRA with the recharacterization code R. The second action was a conversion, reported on a 1099R for the TIRA account as a recharacterized contribution cannot be “re-recharacterized, nor can a conversion. If the conversion had been a failed conversion it would have been treated as an excess regular contribution, but this was not a failed conversion. Therefore, you are correct that the final action was a Roth IRA distribution to be reported using the usual Roth IRA ordering rules on Form 8606. This will also be reported on another 1099R for the Roth IRA, likely coded J. If there is a balance of regular Roth contributions to cover the distribution amount, it will be a non taxable distribution.
  • The 2022 return should include an explanatory statement, only with regard to the original Roth contribution and the date and amount of the recharacterization to the TIRA, and Form 8606 should be attached to report a 2022 non deductible TIRA contribution. 
  • The rest of the actions will be reported on the 2023 return including Form 8606 to report the conversion and the Roth IRA distribution, and also any 2023 non deductible TIRA contribution not yet made. None of this applies to 2024.
  • The 1099R forms when issued next January should be carefully checked to be sure they conform to this description of the various actions. 

Submitted by Silvia Lam on Tue, 2023-03-21 16:01

Thank you for the clarification! The conversion from T-IRA to R-IRA will be regarded as an action for the 2023 return, so does the withdrawal of roth distribution.I have searched a way to help my client to avoid the penality for the “accidental” witdhrawal of roth distribution. Given that he did it the action last month, he could do a “rollover” within 60 days, correct? Basically putting the money back to his Roth IRA. Do he needs to put the distribution back to the original orth ira account? Or it can be other roth ira account. 

Submitted by Alan - IRA critic on Tue, 2023-03-21 16:37

  • FIrst, there is no excess contribution unless client did not have enough earned income in 2022. The TIRA contribution may not qualify for a deduction, but a ND TIRA contribution is not an excess contribution. Therefore, there is no 6% excise tax for an excess contribution. And the Roth distribution is probably non taxable as a return of regular Roth contribution basis, or if there is no regular contribution Roth basis and the distribution came from conversions that were not taxable, there would be no 10% penalty on the withdrawal of pre tax conversions in the last 5 years. It’s not clear what the client’s Roth IRA basis consists of at this point.
  • Client could roll the Roth distribution back within 60 days as long as they have a rollover available, but only one such rollover can be done over a 12 month period. Given the history here, perhaps the client should save this rollover and not use this one. Client’s choice there. If he chooses to proceed with the rollover, it can be done into the same Roth or a different Roth account. 

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