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Excess Roth IRA contributions by IRA conversion

Forum|Forum|3 years ago
March 1, 2023
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I was confused by my trustee and converted too much from my IRA to Roth IRA.

I understand that I should take out the excess with interest earned and report the interest earned to avoid excessive taxation.

Can I put money back into my IRA (recharacterization?) or this is forbidden now?

If I recharacterize or withdraw by the end of the tax season, should I report these operations (Conversion and Recharacterization or Withdrawal)? Will I be able to report as my Roth IRA contribution only the difference between the initially converted and recharacterized/withdrawn?

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Best answer by DanaB27

If you made a conversion (moved earlier traditional IRA contributed funds to Roth IRA) then there isn't a limit that you can convert. Conversions are generally taxable unless you made nondeductible contributions to the traditional IRA (had a basis) then the nontaxable part is calculated on Form 8606.

If you recharacterize a traditional IRA contribution as a Roth contribution then we pretend that the contribution was never made to the traditional IRA but was made only to the Roth IRA. In this case, there could be an excess contribution if your income limited your Roth contributions.

Then to avoid the 6% tax on excess contributions, you must withdraw (request this with your financial institute):

the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
any income earned on the excess contribution.

Yes, if you have an excess Roth contribution because of too high income then you are able to make traditional IRA contributions instead (or recharacterize a Roth contribution as a traditional IRA contribution).

Please see What happens if I made an excess Roth IRA contribution and What's the difference between a conversion and a recharacterization? for additional information.

If you provide more details about what you did then we will be able to provide you with more guidance on how to enter this in TurboTax.

D

DanaB27Answer

If you made a conversion (moved earlier traditional IRA contributed funds to Roth IRA) then there isn't a limit that you can convert. Conversions are generally taxable unless you made nondeductible contributions to the traditional IRA (had a basis) then the nontaxable part is calculated on Form 8606.

If you recharacterize a traditional IRA contribution as a Roth contribution then we pretend that the contribution was never made to the traditional IRA but was made only to the Roth IRA. In this case, there could be an excess contribution if your income limited your Roth contributions.

Then to avoid the 6% tax on excess contributions, you must withdraw (request this with your financial institute):

the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
any income earned on the excess contribution.

Yes, if you have an excess Roth contribution because of too high income then you are able to make traditional IRA contributions instead (or recharacterize a Roth contribution as a traditional IRA contribution).

Please see What happens if I made an excess Roth IRA contribution and What's the difference between a conversion and a recharacterization? for additional information.

If you provide more details about what you did then we will be able to provide you with more guidance on how to enter this in TurboTax.

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K

KASinOR

Employee

Dan, I read your reply related to conversions/recharacterizations of traditional IRAs to Roth IRAsseveral times but I am still a bit confused about how to apply this to my situation, which is as follows:

I am retired, but I did earn a small amount of income this year (less than $5,000).
Last year, I paid very little taxes, since I am living chiefly on social security until I can tap retirement savings at age 70.
This year, I wanted to take advantage of a green energy tax credit, so I decided to get my tax burden up by withdrawing $20,000 from a traditional IRA before the end of 2024.. I took $10,000 of that amount in cash, then reinvested the remaining $10,000 into a Roth IRA.

So my question is: Is the $10,000 I invested into a Roth IRA considered a conversion, and therefore can exceed my earned income of less than $5,000? Turbotax is telling me that I have an excess contribution, and will pay a penalty. Must I change that contribution to the Roth IRA to approximately $5,000 if I want to avoid the penalty? If so, can I put the remaining amount back into the traditional IRA?

K

KeshaH

The money that you took from the traditional IRA and put into a Roth IRA would be a conversion, not a contribution. When you're going through the 1099-R screens for the distribution from the traditional IRA, you will need to show that you converted part of the proceeds to a Roth IRA. The entire distribution will be taxable, assuming that you fully deducted your contributions to the traditional IRA when you made them.

@KASinOR