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I put $5,500 in my Roth, and learned that I'm not eligible to (I make too much money). What's going to happen to me, come the time of reckoning (tax time), and what can I do about this before then?

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If you don't take out your excess contribution (including earnings) by 6 months after your tax filing deadline (i.e. October 15 of the year after the year the contribution was designated under), you will pay a 6% penalty every year until you take it out or until it can count under the unused contribution limit for that year.

One thing you can do (again, before October 15 of the year after the year the contribution was designated under) is re-characterize the Roth IRA contribution into a Traditional IRA contribution. Traditional IRA contributions do not have income limits (there are income limits to deduct a Traditional IRA contribution if you are covered by an employer plan, but that is another matter). Then, assuming you didn't have any other money in pre-tax IRAs, you can convert the money in that Traditional IRA into Roth IRA. You would have to pay taxes on the earnings between the contribution and the conversion, but that probably won't be much. This is a "backdoor" Roth IRA contribution -- the result is basically the same as a regular Roth IRA contribution, but with no income limits.

  • I have both types of IRAs. Can I just take it out of the Roth, and put it into the traditional, now? How do I handle the paper (will the bank send me a statement about my contribution to both IRAs come tax time)? – horse hair May 25 '18 at 15:22
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    Note that you need to take out not only any excess contribution, but any money that that excess contribution may have earned as well. E.g. if you bought a dividend-paying stock, you have to take those dividends out too. Or if the security has increased in price since you purchased it, those gains have to be removed as well. Some careful tracing of where each dollar you put in and how it has done will be necessary here. – R. Hamilton May 25 '18 at 15:58
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    @horsehair: Hmm, if you already have pre-tax money in Traditional IRA it will mess up the backdoor process because the conversion will need to convert pre-tax and post-tax amounts in the same proportion as the Traditional IRA as a whole (the pro-rata rule). – user102008 May 25 '18 at 16:55
  • @horsehair: There is no problem with you re-characterizing the Roth IRA contribution into a Traditional IRA contribution (just talk to your broker about the process), though it will be a non-deductible (after-tax) Traditional IRA contribution, since you don't qualify to deduct it unless neither you nor your spouse have a 401k. And after-tax money in Traditional IRA is not as beneficial as earnings from it are still pre-tax. That's why usually if you do it that way you would convert it to Roth IRA. But if you also have pre-tax money in Traditional IRA that would mess it up. – user102008 May 25 '18 at 16:56
  • I don't have a broker. I just want to take what I put in to the Roth and put it in the traditional IRA instead. But it sounds like it's more complicated than that. – horse hair May 26 '18 at 5:42

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