Contributed to roth. Just got my taxes back, went over the limit. now what?

[Turnerjo13]

In 2015, I dilignetly contributed monthly to a Roth IRA up the the max of $5500 with Wealthfront a Roboadvisor. I just got my taxes back for 2015 from my CPA ( not filed yet) and I went over by quite aways the $182,000 income limit for contributions to Roth IRA's. I have never made even close to the limit before so Roth IRA contributions were previously allowed for me and my wife.

My understanding so far after emailing my CPA is that I need to withdraw the $5500 that I contributed and any gains that were made before 4/18/2016 to not get penalized. I'm pretty sure the only gain would be from dividend reinvestments. The overall account is down for the year. is there an early withdrawal penalty? Can the service tell me exactly how much this is?

 

So what do I do with it now? Do i just cash it out? Im feeling like I could use the cash because now I owe way more in taxes than I was prepared for by April 18th ( a little bit of sticker shock but ill be ok). Can I transfer it to a traditional IRA? Can I use it to do a backdoor Roth IRA and somehow contribute it back into my Roth IRA? Im kind lost on what to do here as well as how to plan for 2016 which I have already made two monthly contributions to a my same Roth account. Any advise would be appreciated.

[jfoxcpacfp]

Congratulations on a successful year!

Assuming you have no pretax IRAs in your name, you have 2 choices:

• Ask Wealthfront to recode the Roth to a TIRA (Traditional IRA) for 2015. The TIRA will be nondeductible if you do not have a retirement plan at your business. Then convert to a Roth IRA via the "back door". This will be reported on your 2016 and 2016 tax returns using form 8606.


• Remove the balance in your account by April 18 and contribute $5,500 to a TIRA by 4/18, then convert to a back-door Roth IRA for 2016.

There is no early withdrawal penalty. Your CPA should be able to answer your questions, too. Since you just emailed him/her, perhaps you'll get this advice in the response you receive.

[The White Coat Investor]

This is called a "recharacterization." After a while, you can convert it back to a Roth IRA. This is a good reason why if you're close to the limit you can just do a backdoor Roth IRA. I did that in 2010 even though it turned out in the end that I could contribute directly.

[jfoxcpacfp]

The White Coat Investor wrote:

This is called a “recharacterization.” After a while, you can convert it back to a Roth IRA. This is a good reason why

Click to expand...

This is one of those rare times I disagree with WCI. Technically speaking, a recharacterization is when you change your mind and decide to undo (reverse) a proper transaction. In your case, you never qualified to contribute to a Roth IRA and you are correcting for an overcontribution.

[Turnerjo13]

Thanks for the responses. I checked with my CPA and no changes are need to my taxes to do the conversion. I didn't qualify for any deductions for traditional IRA contributions. I am working with Wealthfront to get the roth contributions "recharacterized". I have to do it for all of my 2015 contributions and any gains as well as I made monthly contributions for January and February 2016 that will I have to do a separate set of paperwork for. After I get it all sorted out, I will look further into the back door Roth IRA.

 

 

[The White Coat Investor]

jfoxcpacfp wrote:

The White Coat Investor wrote:

This is called a “recharacterization.” After a while, you can convert it back to a Roth IRA. This is a good reason why 

Click to expand…

This is one of those rare times I disagree with WCI. Technically speaking, a recharacterization is when you change your mind and decide to undo (reverse) a proper transaction. In your case, you never qualified to contribute to a Roth IRA and you are correcting for an overcontribution.

Click to expand...

He put it in a Roth when it should have gone into a traditional IRA. Thus, the procedure to fix it isn't to withdraw an overcontribution, but to change the contribution to a traditional IRA. That change is a recharacterization. Did I miss something? I suppose he could withdraw an overcontribution, then do a separate contribution to a traditional IRA, but it seems easier to just recharacterize it, no?

[jfoxcpacfp]

Just semantics between what you and I call a recharacterization, no big deal. Either way, it gets done.

[theplumber]

I've done a recharacterization before and it went smoothly.  When I first set up my Vanguard IRAs for a back-door Roth, I accidentally funded the Roth instead of the traditional.  I had to recharacterize it into a traditional and then rollover into a Roth.  Was a bit scared that I'd accidentally done something illegal when I accidentally directly funded the Roth...