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Accidentally Contributed to a ROTH IRA when I Shouldn't Have

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  • Accidentally Contributed to a ROTH IRA when I Shouldn't Have

    Both my wife and I contributed $5,500 each to a separate ROTH IRA accounts through Vanguard for tax year 2014. I was planning on filing taxes for 2014 jointly, but we decided last minute to file separately to lower monthly payments on income based repayment plan for Public Service Loan Forgiveness program. I just learned that if you are married but file separately, you cannot contribute to ROTH IRA unless individual person's AGI is $10K or less (and we both make more than that)!

    What should we do? Although we contributed $11,000 total, both accounts combined are currently worth about $10,400 (sad, I know). Is there a way to avoid paying penalties?

    Simply speaking, I was thinking of converting the ROTH IRA to a Traditional IRA, then converting back to ROTH if this is even possible for tax year 2015. This way, I should only get penalized for 1 tax year if IRS ever audits me. I assume if I were to do that, my wife nor I could contribute additional funds to ROTH IRA (via back door) for tax year 2015 (married but filing separately again).

    Another method was to refile the tax as married and filing jointly for year 2014. However, I'm not sure how this affects my IBR payments I had made the last 12 months, which was based on my income only given that we filed separately.

    Your advice will be much appreciated!

  • #2
    WCICON24 EarlyBird
    Sorry you haven't had a reply yet - I think your question simply fell through the cracks.

    I hate to be the one to tell you this, especially since you're a resident, but it's too late to convert to a TIRA - that window closed on 4/15/15. You need to take your money out or recharacterize to a TIRA by 4/18/16. You'll owe a 6% excise tax on the $11k overcontribution. So, your paragraph starting with "Simply speaking..." details the correct procedure.

    You will report your excess contribution on IRS Form 5329. I encourage you not to overlook filing this form in the hope that you will not be audited. The IRS matching program should catch it and it's usually worse if the IRS asks you to comply before you clean up your own mess. (As in - if you didn't report this, what else might be out there?)

    It's a long shot, but you might at least plead your case to the custodian and ask if there is any way they could correct for the prior year and file an amended 5498. It's a long shot and they would be admitting that they coded it "incorrectly" when you first deposited. Won't cost you to ask, but plan to pay the excise tax.
    My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
    Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients