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I have (what appears to be) a rather challenging situation involving failed backdoor Roth IRA contributions. At a high level, there were excess contributions for the previous tax year, and last year there was an incomplete Roth conversion.

Facts:

  • The current year is 2020, and am filing taxes for 2019
  • In 2018, my spouse opened both a Traditional IRA and Roth IRA with provider "A" with the idea to do a backdoor Roth contribution.
    • $5,500 was contributed to the Traditional IRA for tax year 2018
    • The money was never converted to Roth
    • By Feb 2020, there was roughly $8,200 in the Traditional IRA
  • In 2019, my spouse opened both a Traditional IRA and Roth IRA with provider "B" with the idea to do a backdoor Roth contribution (the existence of the account with provider "A" was forgotten about)
    • $6,000 was contributed to the Traditional IRA for tax year 2019
    • $5,500 was contributed to the Traditional IRA for tax year 2018
    • The $11,500 was immediately converted to Roth (in 2019)
  • In early 2020, the presence of provider "A" was remembered, and the money in the Traditional IRA was converted to Roth

Net Result of Above Facts:

  • I have an excess IRA contribution for tax year 2018
  • The Roth conversion in 2019 was done in two steps 1 year apart (one in 2019, another in 2020 but intended for tax year 2019 if that is possible)

Questions:

I believe I know what do to (withdraw or carry forward excess contribution and pay penalty and taxes pay tax on earnings in Traditional IRA after the conversion, possibly pay a penalty for not converting all Traditional IRA dollars at once), but I do not know how to do this. There are plenty of guides online for one of these issues in isolation, but there is no blog post "So you really screwed up your IRA" with instructions for handle all of these in union.

How can one address this in as few steps as possible, and correctly report the problem and solution on their tax forms?

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    Please don't ask how this happened... it's a frustrating situation that does not need extra salt in the wound. – SethMMorton Feb 20 '20 at 5:41
  • There's no conversion 'intended for'; unlike contributions recharacterizations and corrections which can be 'backdated', conversions are only when done. Converting in pieces, or just partially, is fine and there is no penalty -- in money; it does complicate reporting, which you seem to dislike. But you converted money you weren't supposed to have in the IRA. Before TCJA I would have said: un-convert A by recharacterizing, then correct trad-A for 2019 before 4/15, and amend 2018 for the 6%. Now I say consult a CPA or even an Enrolled Agent. Sorry. – dave_thompson_085 Feb 21 '20 at 4:44
  • @dave_thompson_085 Yeah. That’s what I was afraid would be the answer. – SethMMorton Feb 21 '20 at 4:45
  • These two bullet points "The money was never converted to Roth" and "the presence of provider A was remembered, and the money in the Traditional IRA was converted to Roth" are not both true. I suggest that you replace the first of those claims with the second, which also brings the related transactions together in your explanation... but there are a number of different ways you could edit to make it correct. – Ben Voigt Feb 21 '20 at 15:17
  • Were you married at the time? If so, did you also contribute to a Traditional IRA? If not (and you were married) then it was probably not an excess contribution. – Eric Feb 22 '20 at 2:28
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First, there is no penalty for not converting money from Traditional IRA to Roth IRA soon or all at once. You can convert any amount you want, in the same year or any later year, and the timing and amount of conversion just affects which year it is reported in, and whether there is any tax upon conversion.

The only thing that you have a penalty for is the excess contribution. You have an excess contribution of $5500 for Traditional IRA in 2018; this is carried over into 2019. This will generate a penalty of 6% * $5500 = $330 for 2018.

However, you also contributed up to the limit ($6000) in 2019, so you still have an excess of $5500 for Traditional IRA in 2019. I believe that, had you not converted to Roth IRA, you might have been able to avoid the penalty for 2019 by withdrawing $5500 of your contribution for 2019 (leaving a $500 2019 contribution, so that it can absorb the entire $5500 excess from 2018) since it is before the tax filing deadline for 2019. However, now that you converted it to 2019, I believe that that is no longer possible, as there is no money in Traditional IRA to withdraw from anymore, and you are no longer allowed to recharacterize to "undo" a conversion starting in 2018. So I believe you will have to pay another penalty for 2019, and hopefully end it in 2020 by contributing no more than $500 for 2020.

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