[Editor's Note: The following is a post written by a general dentist and a chiropractor that blog as a couple about their journey to get out from under a combined $450k in student loans at Doctors On Debt. Today they're talking about a common mistake I often see with Roth IRA contributions — over contributing. A pesky $458.33 miscalculation can cause a lot of work! What I love is that it that they found their mistake because they became educated about finances. After the headache of correcting the mistake, I'm guessing they are even more confident and financially literate than ever before.]
The beginning of a new year is typically a busy time for us at Doctors On Debt. Amongst many other tasks, one of the things we try to complete as soon after the new year as possible is making our Backdoor Roth contribution. For the most part, making Roth IRA or Backdoor Roth IRA contributions is pretty straightforward if you follow the directions. As you’ll see, however, it’s still possible to get yourself into trouble if you don’t pay attention to the details. Hopefully, this post will help prevent someone else from making the same mistakes we did.
Backdoor Roth IRA Review
Very quickly, let’s do a simple review.
The White Coat Investor has a great step-by-step guide on how to do a Backdoor Roth (also, and more properly, known as a Roth conversion). There is also a guide for how to do a late contribution to the Backdoor Roth, for when you make the contribution and the conversion the year after the tax year for which you want the contribution to be treated.
I would direct you to reference the aforementioned guides for the nitty gritty details on how to do a Backdoor Roth, but the general steps are as follows:
- Make a non-deductible Traditional IRA contribution
- Convert that Traditional IRA contribution to a Roth IRA.
It’s really that simple. If you’re doing it on Vanguard, it is literally clicking a couple of buttons and inputting an amount. Your specific situation may require some other steps, so be sure to refer back to the Backdoor Roth guides mentioned above.
In my opinion, the complications with a Roth, and particularly a Roth conversion, come from the paperwork. It’s not really that hard, but it can be overwhelming if you’re not used to looking at it.
Roth Contribution Phase-Out
My wife and I are both healthcare professionals, and like many readers of this blog, our income doesn’t allow us to make direct Roth IRA contributions, hence the necessity to employ the Backdoor Roth technique. However, early in our careers, this wasn’t the case. For a year or two after our schooling, we were able to make direct Roth contributions – up to a point. After a certain income level, one’s ability to make a direct Roth contribution begins to “phase out” and they are limited in how much they can contribute directly to a Roth IRA.
It just so happens that (according to a quick google search) the average physician salary is $189,000. It’s not hard to imagine, then, that many single doctor couples who are married filing jointly will fall into that “phase out” income limit that is between $189,000-$199,000. It’s very important that if this applies to your situation, you pay close attention to your Roth contributions.
We didn’t, and it turned into quite the headache.
How We Screwed Up our Roth IRA
Our Roth IRA screw-up was because we over-contributed in a year when our income dictated that we were to limit our contribution due to the phase-out rule. This all began in 2014. How we over-contributed is still a point of contention and to this day the details are enough to drive us mad, but in the simplest terms it came down to a few mistakes that were made:
We Complicated Our Contributions By Spreading Them Out
We were using a financial advisor at the time who was working for, let’s call it, Big Firm 1. We were each contributing $458.33 per month with the plan of each having a full Roth IRA contribution of $5,500 for the year at the end of 12 months. We didn’t begin contributing until May 2014, so we were going to contribute up until Tax Day 2015. In other words, our contributions were being spread out over 12 months, across both 2014 and 2015, but all were going to be treated as 2014 tax year contributions. Clear as mud, right?
We Messed Up Our Auto Payment System
On top of our spread out contributions, another complicating factor was that the financial advisor we were using at the time (we are no longer with that advisor) took a new job and left Big Firm 1 for Big Firm 2 at the end of 2014. We were convinced to follow him to the new firm, further muddying up our automatic withdrawal system that had been put into place at Big Firm 1.
We Miscalculated Our Contribution Limit
While our financial advisor was making the transition from one firm to the other, we put our automatic contributions on hold after one monthly deposit to the new firm (this is an important detail) because we began to suspect we were going to be limited due to the phase-out rule. Up to that point, we had contributed $458.33 each for 8 months (7 at Big Firm 1 and one at Big Firm 2), for a total of $3,666.64 apiece. Our accountant crunched the numbers and calculated our contribution limit to be $4,550 each. Someone (we honestly don’t remember if it was our financial advisor, our accountant, or us) took this information and figured up one final contribution of $1341.69 apiece that we should make to reach our limit, and in March 2015 we made those final contributions for our 2014 Roth’s. Do you see a problem here?
The result of the above was that we each over-contributed to our Roth IRA in 2014 by $458.33, the exact amount that our original monthly automatic withdrawal had been. Coincidence? Of course not; the single monthly deposit we had made to our financial advisor’s new firm at the end of 2014 had failed to be accounted for when figuring up our Roth contribution limit.
So whose fault was this oversight? Our financial advisor’s, for failing to keep accurate records of our contributions across his two jobs and allowing us to make the final over-contribution when he should have known it was too much? Our accountant’s, for not catching the mistake while reviewing our Form 5498’s? Or was it ours, for not taking more ownership of our finances at the time and making sure we knew exactly what was happening with our money? There’s probably enough blame to go around for all three.
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How We Found Our Over-Contribution Mistake
Tax year 2014 came and went, my wife and I simultaneously pleased about making more money in 2014 than we had anticipated and gleefully unaware of the mistake made contributing to our Roth IRA’s. Ignorance is bliss, and any thoughts of our 2014 IRA contributions quickly disappeared after Tax Day came and went, our money concerns returning to more pressing matters like paying off student loans.
Fast forward through 2015 and again our income had gone up. Even though we still didn’t realize a mistake had been made in regards to our 2014 Roth contribution, we knew that we didn’t want to hassle with figuring up our IRA contribution limit again; we thought we would be over it anyways. We decided early on that we would make a Backdoor Roth contribution for 2015 and so we focused our efforts on learning about that process. It’s also of note that in the meantime we had left our financial advisor and moved our assets to Vanguard, taking full responsibility of our finances for the first time, which dictated that we become more educated on the subject.
Humorously (if you have a sick sense of humor) it was because of our newfound interest in our finances that we discovered our 2014 Roth IRA over-contribution mistake while performing an educational review of our already submitted 2015 tax forms (this was after Tax Day 2016). So, to break that down: In May of 2016, after submitting our tax forms for 2015, we discovered an excess Roth IRA contribution made in 2015 for tax year 2014. Again, clear as mud.
How We FIXED Our Over Contribution Mistake
So, okay, we found a problem. How do we fix it? After the initial shock of the discovery and frustration that it was missed to begin with, we began to research what we should be doing next. On the surface, it sounded pretty easy: Contact Vanguard (who our funds were with at the time the discovery was made) and let them know we made an excess Roth IRA contribution. They send some paperwork, we fill it out and sign it, they send a check, and voila, problem solved, right? Unfortunately, when the IRS is involved things are not that simple.
After extensive research, we were finally able to get enough information on how to correct the mistake. Remember, every situation is different and the devil is always in the details. In our particular situation, we had 3 years we needed to account for to make the Taxman happy: 2014, 2015, and 2016. Here’s how we did it.
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File Forms 1040X for both spouses and for both years 2014 and 2015. Because we owed more taxes than we had originally reported and paid in those years, we needed to file amended 1040’s to report the missed tax and make our payments. Those 1040X’s needed to include several other tax forms for each year, and those were as follows.
2014: Account for the excess contributions that were made in both of our IRA’s in that year. To do this we used Part IV of the 2014 IRS Form 5329 (one for each spouse) and reported our excess contributions in that year. After following the instructions, Line 25 showed the additional 6% tax we owed on the excess contributions.
2015: Account for the excess contributions from 2014 that stayed in our accounts for tax year 2015. Again, we used Part IV of the 2015 Form 5329 (and again, one for each spouse) and this form was used to show the carried over excess contribution from 2014. That amount was placed on Lines 18 and 24, and Line 25 was again used to show the additional 6% tax we owed for holding 2014’s excess contributions in the accounts throughout 2015.
2016: Take a distribution from each of our Roth IRA’s for the same amount as the excess contribution was. This step required two forms each: We both needed to use the 2016 Form 5329 to show that we took a distribution from our Roth’s and that it matched up to a prior year’s excess contribution (hence showing that excess was removed from the account and we were no longer on the hook for the additional 6% tax we owed on it), and we also needed to use Part III on IRS Form 8606 to show that the distribution we took was part of the basis in the IRAs, eliminating any potential taxes we owed on the distribution.
Write a narrative to the IRS explaining what we were doing. We wrote to the IRS to explain our situation and clear up any questions they might have about what our intentions were.
So what did all of that amount to? A lot of hours, 10 extra IRS Forms, and a page explaining ourselves. Not to mention the additional 6% tax we had to pay on the excess contribution from 2014 and 2015, plus several stamps to mail it all. Luckily, the tax liability was very small. The hassle of going about correcting all of this was the bigger issue.
What Would Have Limited the Headache?
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Honestly, there’s one simple thing we could have done to avoid this problem entirely: Double- and triple-check our Roth contribution amounts and limits! If any of the three entities that cared about our finances (us, our accountant, or our financial advisor) had bothered to stop for a minute and double-check the numbers, this problem would have been completely avoided.
Thanks for reading our post. Again, this was a very specific scenario for our own financial situation, and the steps we took to rectify it were based on the details of our situation. Yours will be different, but with this post I hope we’ve done two things: 1) Given some indication of the annoyance it can be to correct an excess contribution mistake, and 2) made it sound bad enough that you’ll do your due diligence when making your own contributions and keep yourselves from making the same mistake!
For further reading on the subject, Vanguard has a pretty good page that gives more details on deadlines and instructions for different situations.
[Editor's Note: Want to make your financial life easier? Do your contribution and conversion step during the calendar year, do it all in one lump sum, and do the conversion the day after your contribution. Trust me.]
What do you think? Have you made mistakes requiring you to file a 1040X? Was it your fault or that of an advisor? Comment below!
My system to avoid overcompensating or losing track is to just do one big deposit every year to the maximum allowed. It isn’t ideal for dollar-cost averaging, but it does avoid the confusion of losing track of iterative contributions and tracking.
I take the money out of my emergency fund, deposit in my IRA-then backdoor it to the Roth early in the year. Then, during the year I just pay my emergency fund back. Of course if you use this method it’s wise to realize your emergency fund will be a bit lower for a while but I keep mine at a healthier rate than I probably should so it’s no big deal for me.
This is exactly how we do it now!
The hassle of DCA simply isn’t worth it (and the benefits are debatable).
What benefits? A psychological crutch at best.
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
I think WCI hit the nail on the head there at the end.
You guys make enough money that you should put your $5,500 (or $11,000 if married) into your TIRA all in one shot and then convert it ASAP. This makes all of these troubles go away. No complicated math. I understand dollar cost averaging, but for a roth IRA it is not worth the headache. Just lump sum it in whenever you can during the year. Hopefully, that’s in January. But if its not, then wait until you have all of the money and then just toss it into the TIRA in one pitch and turn.
This does sound like a massive headache, and I bet people in your situation are thankful for the specific and complete response. For the people who are doing their backdoor Roth for the first time follow the tutorials out there. Many of us have created one. And just do it all at once.
TPP
We definitely learned our lesson!
Early in our careers we were completely lost when it came to finance. We did what our advisor said and didn’t look back.
That proved to be a complicated mistake, at least in this situation.
We use a system like Accidental FIRE. Our emergency fund has become sort of our slush fund for lumpy expenses, like backdoor Roth contributions (eventually, when our taxable account becomes our emergency fund, our emergency fund at Ally will become purely a liquid “lumpy expense” account). It’s so much easier to keep track of a single maximum tIRA contribution and convert it immediately. That way, you don’t have to worry about paying tax on any IRA returns, either. If you don’t have the cash flow to do a pair of single one-time maximum tIRA deposits at some point during the year, you can essentially break it up into 12 deposits into your emergency fund/other savings account to save up for your 1 maximum IRA deposit, to be made the day before you do your Roth conversion.
It’s nice to see another pair of docs having the same type of trial-by-fire financial awakening we did, and blogging about it.
Thanks for reading!
We do exactly what you guys do now – right down to the emergency “slush” fund at Ally.
I just hate that the IRS makes high income earners jump through this extra hoop to make a roth ira contribution. They have already stated that backdoor roth ira conversions are perfectly legal. So why can’t we directly contribute to the roth ira in the first place? And as high income earners in the highest tax bracket any money we put in roth (direct or indirect) brings them the most tax dollars possible so why not make it easier? Another ridiculous government regulation that complicates lives of high income earners
Yeah, it’s a head scratcher for sure. Especially since they’ve come out and said that the Roth conversions are legal.
As far as the tax revenue goes, I think the argument could be made that high earners now are (likely) to be high net worthers later, so tax revenue could be lost on the back end if they are able to make retirement withdrawals tax-free.
Obviously it’s complicated because of tax rates, yearly earning, etc, but again, it’s almost a moot point because they’ve already declared the conversion legal.
Really unduly complicated.
In all fairness to the IRS, they aren’t the ones who made those rules. It was congress passing a series of laws. When they wrote Roth IRA’s into law they had the income limits on both contributions and conversions because the point of retirement accounts was to encourage people to save for retirement and they assumed the high earning “rich” people didn’t need to be encouraged to save. (I’m not saying they were right, just explaining their reasoning.)
More recently a different session of congress changed the law to remove the income limits on the conversions because they saw the huge amounts of pre-tax savings and figured by allowing people to convert from pre-tax to tax-free accounts the government could get the cash from them now. But they didn’t remove the limits on the contributions because the Roth IRA was still supposed to encourage people with less income to save some of it for retirement.
The loophole was created because they didn’t put any sort of requirements on when you contributed and when you converted AND the fact they allowed “non-deductible” contributions to Traditional IRAs in the first place (which pretty much no one ever did before the backdoor contributions/conversions were a thing because you’d generally be better off investing in a taxable account).
So if you want the contribution limits removed, gripe at congress not the IRS. (Sorry, you might have touched a nerve. I get tired of people hating on the IRS all the time when their job is pretty much taking the crap laws congress writes and converting them into formulas for people to figure out at tax time. )
The average physician salary doesn’t seem to be $189,000.
Please be professional, do your homework, and use real, current, and cited sources.
Thanks for catching that!
That figure was left behind from our initial draft, and that’s our mistake for not updating it prior to publication. It relates to family practitioners, pediatricians, and psychiatrists only, but it was old information and needed updating.
Here are some pretty thorough numbers, and the averages are much higher for physicians (about $217k for primary care in 2017).
https://www.medscape.com/slideshow/2018-compensation-overview-6009667#2
The White Coat Investor has a large readership which includes physicians, dentists, attorneys, nurses, chiropractors, veterinarians and other relatively high-income professionals. It’s clear that there are still a lot of professionals who will fall around that $190k-$200k number that could get them in trouble with their Roth contributions if they’re not careful.
Hopefully this post will remind them to keep their eye on the details. Thanks again!
Whew what a nightmare! Vanguard conveniently tells me when I log in to consider making a contribution how much of 2017 and 2018 max IRA contributions have been made, so I never mess that up. Just have to be certain about income limits re direct Roth or not. And remember to go do it.
Lately semiretired I was putting money in every time husband got a paycheck from his hobby job (< $5.5 K income) to be sure we maxed out contributions. As I return to work soon no direct Roth possible this year and luckily husband is no longer working so I needn't recharacterize Roth contributions as has happened in the past with job changes (or forgetting to alter which account the contributions go to). Even that is a bit of a nuisance but Vanguard makes it fairly straightforward.
I seem to see a lot of complaints about Vanguard’s customer service on different forums and blogs, but I will say that they were pretty helpful to us as we were figuring all of this out. We haven’t had the problems with them as others do.
I can’t help but wonder if you could’ve just ignored this. IRS isn’t going to be coming after you for $480…
We actually talked about doing that, and you’re probably right.
To be honest, in hindsight, it may have been the better option rather than spending as much time and effort as we did to correct this.
Then again, it’s only really a problem if you get audited. And then where do you draw the line? At some point you want to be certain your taxes are as close to being perfect as possible. If we weren’t going to worry about $480, why worry about a $1,000 mistake?
If nothing else, we got an education.
I’m the same way (we’re doctors and perfectionists in all aspects of life…) If they do find a mistake during an (unlikely) audit, you pay whatever extra taxes you owe, plus some interest +/- small penalty. Not like you’re going to jail for an honest mistake.
I dunno, they came after me for $800 they thought I owed (I didn’t.)
Is the 189,000 limit for Roth contributions referring to Total Income, Adjusted Gross Income, or Taxable Income?
The income limit is calculated using modified AGI.
Details here:
https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-your-taxes/L7kHckNS3
In addition to not being able to contribute to a Roth IRA directly, the frustration extends, or perhaps I’m just feeling left out on the back door Roth IRA deal, for high income people with a traditional IRA that has pre-tax and non-deductible contributions that grew big (20 years). The tax for conversion just doesn’t seem to be a good deal (still employed and maxing out on 401k). Am I missing something?
Everyone’s situation is different. I know some people with large tIRA’s who have decided against doing the Backdoor Roth because they don’t want to pay taxes on the conversion, as in your situation.
We ourselves only do one Backdoor Roth at the present time because one of us opened a SEP IRA. Our plan is to roll that into an individual 401(k) to avoid having to pay the conversion tax, but that doesn’t sound like an option for you, unfortunately.
If your IRA is a mix of pre-tax and post-tax contributions it gets even more complicated. Might not be worth the hassle for $5500 a year.
No. Many people have made the same decision in the past. Sometimes the basis can be isolated though, which can make Roth IRAs advisable going forward.
omg, I’m going through this now. I’ve always been able to to make a full Roth IRA contribution, so that’s what I did for last year on Jan. 1, 2017. Then I got laid off in December, and my ex-employer direct deposited a check on Dec. 31 for unused vacation time. I was preoccupied with other things, like what I was going to do for the rest of my life, and only realized after I’d done my taxes in April that due to that check I was over the limit.
Removing the excess contribution was the easy part. It took 5 minutes on the phone with Vanguard. Plus they calculated the excess earnings — I owe the IRS taxes on $80.18 in excess earnings. That’s about $20 at my tax rate.
But, I have no idea what to do now. From this very helpful, detailed post, it looks like I have to file a dozen or so forms. Covering both 2017 and 2018 since I only removed the excess contribution this April? I’m going to try to figure it out by re-reading this post carefully. But honestly, I may end up just sending the IRS a check for $20 with a long letter explaining what happened. If they want to write back and tell me what to do, that would be great.
If I had it to do over, I think I would just ignore the mistake, and assume the IRS wouldn’t send me to jail if they discovered in future that I owe them $20.
Sounds like you need to file a 1040X to me. If you do your own taxes, this shouldn’t be a big deal, just follow the instructions. If you don’t, go see your tax preparer and they can help.
WCI is right, you need to file a 1040X.
In your case, it sounds like you only need to file a 1040X for 2017, along with a Form 5329 for 2017 that shows the additional 10% “penalty” tax due on your earnings since you withdrew them prior to 59 1/2 (assuming you haven’t reached that age yet).
I don’t think you’ll be required to file a Form 8606 because Vanguard has already basically shown you what part of your distribution was contribution vs. what part was earnings.
That’s different from our situation because we waited long enough that we actually got to keep our earnings, but had to pay taxes on our excess principle for the years that it remained in the account.
More details here.
https://vanguard.com/pdf/s373.pdf
I am in nearly the exact same situation in the 2015 and 2016 tax years where I contributed 5500 lump sums then realized post hoc that I was ineligible due to getting married and filing separately (student loans).
I talked to an accountant who explained some of what you talked about, and to vanguard. I did an excess withdraw and vanguard sent me a check, and they both advised I leave the earnings from 2015 (about 500$) in the account.
I am ok leaving this money indefinitely if that will save me the headache of interacting with the IRS, but I would like to do a Backdoor Roth for myself and my wife this year my persistent concern has been, that even if I open it with another company, having that money sitting there will somehow mess things up. Is there any chance of that realistically happening?
I don’t see why having money in a Roth IRA would impact a later Backdoor Roth IRA. But it’s not clear to me what exactly you did with the 2015 contribution’s earnings and why.
I just left them in the Roth acount with Vanguard, the gist I got from the accountant was that if I leave the earnings alone in the account I would be ok…
That depends on when the excess contributions were made and when they were corrected via distribution.
But none of that should really matter for your contributions moving forward, I don’t think.
If the excess contributions were left in the account past October 15th of your tax filing deadline (e.g. contribute in 2015 for 2015, realize after October 15 2016 that there was an excess contribution), then yes you leave the earnings in the account and only withdraw the excess contribution. You have to pay a penalty tax of 6% on the excess contribution for each year it was left in the account. In this example that would be 2015 and 2016.
Thanks for the help and advice. I have to double check the dates but it’s likely that I owe the 6% for 2015 and 2016 which would come out to 990$. It looks like from above I would need to do the 5329 for each year to rectify. Would I also need 1040X forms?
Also, should I just leave it alone and do a Backdoor Roth with fidelity?
You only owe the 6% tax on the excess contribution for the years the contribution was in your account. Unless you contributed $8,000 extra then that $990 is high…
You would need 1040X forms for both years and 5329’s as well. You probably also need an 8606 to show your distribution was a part of your basis, and not earnings.
Whether or not you do a Roth with Fidelity doesn’t change the fact that you need to fix this, unless you want to roll the dice.
Ok will do thanks again for the help and encouragement
This is actually very helpful but…we overcontributed for 6 years and 5 years respectively to our Roth IRAs. We feel so stupid, but we’re in the process of correcting it. I didn’t know the IRS forms were so complicated, but I’ll take solace in knowing that I have this resource.
My wife had $18,000 in a state ran pre-tax retirement account (401a) from teaching. During my M4 year I read WCI and opened Roth IRA’s for both of us and rolled her 18k to the Roth. Vanguard advised me to open a Traditional IRA or “roll over IRA” account. The money was then placed in the Roth IRA and I paid taxes on the 18k. Under transcription type on Vanguard it states: Rollover, Sweep In, Sweep Out, and Conversion Outgoing. Was I supposed to fill out a Form 8606?
You should do an 8606 for the tax year you did a Roth conversion in. If you did the conversion this year, then you do an 8606 next April.
Thanks!
I did the 5500 TIRA to Roth IRA for me and my wife several months ago. First time.
My conservative accountant (yes I know, I read the accountant advice on WCI, will heed) advises I “liquidate” the Roth IRA for now given another dilemma I’m dealing with on an interval rollover of a big 401K to a TIRA.
1) if I do this, will the 5 yr penalty rule not apply since I’m not claiming it toward my gross income? I hope it won’t. The same accountant seems to think I’m okay in this regard (“likely won’t apply”, he writes). Realizing nothing here is binding, do you concur?
2) problem 2: We may keep my wife’s 5500 converted Roth IRA but we made another blunder here. Converted 5500 of 5504 (it had grown) and didn’t realize this balance till later and then converted the last $4 more after a 60 day period had lapsed. We should’ve left it there or cashed out. Too late though. What kind of paperwork hassle am I in for, despite the de minimus amount? Can we alternatively tell the IRS we will apply it to next year (I read this is a possibility; how would you indicate that and it’s a “backdoor”, is that possible?)
Thanks in advance.
1. I’m lost as to the why here and worry you’re getting crummy advice. Why are you rolling a big 401(k) into a traditional IRA? So your advisor can charge you AUM fees on it? Why not leave it in the 401(k) or roll it into another 401(k)so you can do Backdoor Roth IRAs?
2. You’ll owe taxes on the $4. No big deal. Just put $5504 on the conversion amount and $5500 on the contribution amount on the 8606.
Thank you, you made me feel much better. So sounds like the >60 day on the last $4 will not require a separate form.
Yes, my error big time on the rollover (corporation ended and had to move it). At present I do not have another 401/403 option to further roll it to. I’m trying to create a solo 401k to move it to. I should be able to since I did a standard trustee to trustee rollover. Work in progress to correct my initial error and I am indeed likely getting less than good advice.
That’s correct. I wouldn’t call it a big time error. Happens to me every year. I think it’s $0.72 this year for me. I left that in the IRA. Lots of options.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
This is actually very helpful but…we overcontributed for 6 years and 5 years respectively to our Roth IRAs. We feel so stupid, but we’re in the process of correcting it. I didn’t know the IRS forms were so complicated, but I’ll take solace in knowing that I have this resource.
It is slightly unclear which forms are necessary if you are under age 59.5 but you do catch the problem (excess Roth contribution) before April 15th and have Vanguard correct it with the removal of contribution and earnings and you know what those earnings are? I see the 5329 is necessary because of the tax on the earnings, but since the transaction occurred in 2019 for a 2018 Roth contribution, is the 5329 really a 2019 addition and not 2018 tax season.
Also, if you pull out too much excess contribution just to be safe. Is it possible to put some back in the 2018 allocation before the April 15th deadline?
Sure, better hurry though. You’ve only got 6 hours.
Thank you so much for this article. I just discovered I made an excess Roth contribution in 2019 now that I am preparing my 2019 taxes. Since I’m catching this well before April 15, do you know if it’s possible to recharacterize the Roth contribution to a traditional non-deductible IRA contribution and then convert it as a backdoor Roth? Or is that too many steps back and forth to be kosher?
I think you can. There is a waiting period to convert it, so be sure to look that up and wait as long as necessary.
I have a clarification question on an excess Roth contribution and earnings that was removed but where the earnings were not included in tax return.
Specifically, in 2018 I made a $4000 Roth contribution. In April 2019 when doing my taxes, my MAGI for 2018 was too high to make a $4000 contribution to my Roth IRA. I could make $3960 Roth contribution. I had $42,67 ($40 excess contribution + $2.67 earnings) removed from the Roth IRA by April 15, 2019. They were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me. I just realized this tax year that I did not reflect this removal of excess funds and earnings currently from my 2018 tax return. I am also younger than 59 1/2 years old.
In my 2018 tax return, I incorrectly added a Explanation Statement that said I recharacterized my excess contribution. At the time I input my 2018 tax return, I thought I had recharacterized excess into traditional IRA; but that is not what happened.
After recently checking, I found that the excess funds and earnings were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me.
What are the specific steps and forms that need to be executed to correct my 2018 tax return?
This is what I think needs to be done but could you confirm/refute these steps.?
1) file an amended 2018 tax return. On amended 1040, add $2.67 to line 4a and $2.67 to line 4b.
2) Revise Explanation Statement to say how funds were allocated after being removed.
3) complete 5329, line 1 since I’m under 59 1/2 and will have to pay 10% penalty on earnings that were withdrawn? Anything else need to be completed on form 5329?
Is this the process?
I’m not sure I’d do anything for $42. I don’t think they’ll audit you for it. If they were going to, they probably already would have. Have you considered doing nothing?
But if you want to do something, I think your solution will work fine.
Greetings. Love your column!
Maybe you can answer a question… We are teachers in our early sixties married filing jointly.
An unexpected large source of taxable income put us over the Roth IRA limit this year. We both had contributed $7,000 already for 2021. We called Vanguard and and had the excess contributions removed. I then sent Vanguard a $7,000 check to start a new traditional IRA, which hopefully in a few days I can convert as a backdoor Roth.
The problem: I had already filed our tax return using TurboTax, and it’s funny that it did not flag our excess contributions.
Now I’m wondering if I should file an amended return showing no Roth contributions, and an 8606 for my non deductable traditional IRA contribution.
Any thoughts?
Yes, file an amended return. You shouldn’t have removed the contributions, just recharacterized them, but it probably works fine.
Thanks for this great resource. I have learned so much from this website and the WCI podcast.
In January 2024 I over-contributed $7000 to Roth without doing a back door because I earned more than expected in 2024. I have already contributed to Roth via back door for 2025. What is the best method for righting this over contribution mistake for 2024? If I recharacterize the $7000 + 2024 earnings on this money to a traditional IRA prior to October 2025, I do not have to pay a penalty? If this is the case, should I leave the recharacterization in the traditional IRA account indefinitely (until retirement) and make all future contributions for back door through a separate, new traditional IRA account? Thanks very much for your help and time.
I found the answer to my question on a more current thread.
https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/
I will perform a back door once these funds are recharacterized, pay taxes on gains, and follow-your detailed steps in this above post for making a late contribution through the back door. Thanks again for all you do!
I found the answer to my question on a more current thread.
https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/
I will perform a back door once these funds are recharacterized, pay taxes on gains, and follow-your detailed steps in this above post for making a late contribution through the back door. Thanks again for all you do!
Recharacterize the 2024 contribution. Then reconvert it and pay taxes on any earnings. No penalty due, but there is a deadline. No need to use a separate account. Wouldn’t help anyway. All accounts count toward the pro-rata calculation.
https://www.whitecoatinvestor.com/ira-recharacterizations/