What do I do now if I contributed to Roth IRA in 2012-2013 and my MAGI exceeded the limit?

Question

In 2013 I opened a Roth IRA for year 2012, contributing $4000 for year 2012.

In 2014 I contributed $5500 to that same Roth IRA for year 2013.

In 2015, I realized I was not eligible to contribute to a Roth IRA in 2012 and 2013 due to MAGI exceeding the limit. I opened a new account (Traditional IRA), deposited $5500, then immediately did a conversion to a new Roth IRA. (This is the "backdoor" approach as I understand it, is perfectly legal, and what I should have done in previous years). So I believe my Roth IRA account #2 (for tax year 2015) is in good standing

So now, what exactly should I do with the first Roth IRA account that I contributed to (incorrectly) for years 2012-2013? Luckily (?) there is only about $500 of gain in the account at this time.

If I re-characterize it as "Traditional IRA", have I missed the opportunity to do the conversion to Roth IRA for years 2012 and 2013?

Out of curiosity: Had I not caught this error, what would be the implications at Retirement time when I tried to take money out of the Roth IRA? Would the funds be treated as ordinary income (plus penalty?)

Lastly, with all this seemingly "fancy footwork" opening Traditional IRA and converting to Roth IRA, what documents (if any?) do I need to hold on to when it comes time to withdraw from the Roth IRA at retirement time to ensure the tax-free benefit?

Answer 1

I believe that recharacterizing a contribution for a given year can only be done before the tax filing deadline for that year. So it would be too late to recharacterize them now.

At this point, I believe the only things you can do are (see What if You Contribute Too Much?):

• Withdraw the excess contribution amount from your Roth IRA, or
• Have the excess contribution amount be absorbed into the contribution limit for a future year, by contributing less than the limit in those years. (This option may not be available to you since your Roth IRA contribution limit seems to be 0 in recent years.)

The implications are not at the time of retirement -- rather, the implications are that every year since the excess contribution, you have to pay a penalty of 6% of the excess contribution, until you take it out (or it is absorbed into a future year's contribution limit). If you haven't been reporting that penalty on your tax returns in the last few years since your contribution, that also means you have been underpaying your taxes and you need to go back and fix that.