Removal( of Excess Roth Contribution Question
If a person (age less than 59 1/2) contributed $6,000 to a Roth IRA in December 2023 and bought shares of stocks. Then realized in March 2024 that you weren’t eligible to contribute to the Roth. Can you just fill out a removal of Roth excess contribution form with your Roth custodian and move the shares of stock purchased w the contribution to a regular brokerage account and then no gains would be realized and the shares would continue on as if they have always been in the brokerage account and the Roth contribution was never made? Seems like that would be an easy way to undo the contribution and not have to sell shares. Would also need to move over any dividends earned as well I guess. Thanks so much for your help. Please advise.
Permalink Submitted by Alan - IRA critic on Thu, 2024-05-09 02:43
There is no requirement that an excess removal be done with cash, and the removal form may include an option to state which investments are to fund the removal. This situation sounds like the Roth account only holds this one contribution and if so the entire value of the Roth would be distributed in cash or shares. If there were any gains on the investments while in the Roth they would be taxable on the 2023 return and the 1099R distribution code would indicate that.
Shares returned from the Roth IRA would have a cost basis in the taxable brokerage account equal to their value on the date of the corrective distribution.
Permalink Submitted by Jane Gies on Thu, 2024-05-09 13:21
Thank you so much for your reply. The account actually holds stocks that were purchased from a 2022 contribution as well. Those shares have remained untouched in the account–never sold and then the 2023 (ineligible ) contribution was made and another separate different set of stocks was purchased so its very easy to see which shares to remove just to clarify.
How does the cost basis of the shares returned from the Roth IRA get adjusted to the value on the date of corrective distribution? Does the custodian adjust that in the online account or do I have to keep track of it myself?
Thanks so much for your help.
Permalink Submitted by Alan - IRA critic on Thu, 2024-05-09 15:17
The removal can include any investment in the Roth, regardless of when it was purchased or from what contribution it was purchased. Only the amount of excess plus/minus gain or loss on that excess matters because the adjusted total value of the excess must be removed. While the majority of these excess contributions are removed as cash, a removal form may include an option to list the investments to be removed, or if it does not, the IRA owner could indicate what investments should be used for the corrective distribution, and the order thereof, since investments change in value right up to the minute the excess removal is processed. For example, the taxpayer might indicate to use investment x, and to the extent there is not enough value of x, to complete the excess removal using investment y. Again, the removal can include any holding in the account, whenever purchased. And the 1099R will only report the value and the amount of taxable gain, if any. It will look the same as if cash was removed.
The custodian should keep track of the value of each investment removed and track the basis in the taxable account. The holding period of the investment starts on the date of distribution, not on the date it was purchased in the Roth IRA.
These guidelines equally apply to recharacterized contributions. For example, if the taxpayer has no pre tax IRA value, they might recharacterize this excess to a TIRA, then convert the TIRA to Roth tax free (so called back door Roth). This is a common tool to deal with excess Roth contributions, rather than removal. But this strategy is impaired by the pro rate rules if the taxpayer has other TIRA, SEP, or SIMPLE IRA balances.