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Help! Excess contribution mistake to nondeduct IRA

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  • Help! Excess contribution mistake to nondeduct IRA

    Last year i switched my nondeduct IRA and Roth IRA from american funds to Fidelity. Apparently there was an auto debit that was kept on the nondeductible IRA account with American Funds for this year. Problem is I already contributed the max 5500 and did the backdoor Roth conversion this year via Fidelity. So now what do I do with the extra 5500 that has been auto- debited to the nondeduct IRA with American Funds? Is there any way I can convert it to roth for 2018? Or so I have to now cash out and pay all the fees, taxes, early withdrawal penalties? The only other retirement account I have is my solo 401k. Thanks in advance for your help!!

  • #2
    Withdraw as excess contribution before April (just do it now). Pay tax only on gains.

    Good explanation here: https://www.taxact.com/support/1280/2016/ira-or-roth-ira-excess-contributions

    Not an emergency...just a nuisance :-)

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    • #3
      Just follow  DMFA 's advice. You cannot change it to "2018" because you cannot contribute in advance of the calendar year. There will be no early withdrawal penalties. You could even take out the first $5,500 without penalty because you are always allowed to distribute original contributions to personal Roth IRAs. Unfortunately, you'll pay taxes at your ordinary income rate rather than dividends or capital gains rates because it is 1)  considered retirement account growth, and 2) less than 1 year.

      Since the year is not over (and forms have not been printed), it may be worthwhile to check with Fidelity and/or American Funds to see if they can re-code one of the accounts to a taxable account. That way, you won't have to cash out and pay any taxes. Worth a try.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Thinking a little outside the box.

        This may be one of those rare circumstances where it might make sense to not return the excess contributions and earnings. You would instead leave the excess contribution and earnings in the plan, file a 2017 Form 5329 and pay a 6% excise tax on the excess contribution.

        This would kind of get you what you want. You would then apply the excess contribution as a 2018 contribution. Do not make a 2018 contribution, this excess will take the place of it. You will file a 2018 Form 5329 to reconcile your excess contribution balance by applying it to the 2018 contribution limit.

        The reason I suggest this is because we have had significant growth in the stock market this year. Now couple this with the fact that you are doing a back door Roth, which would imply you are in a higher tax bracket. So maybe the 6% excise tax on the excess contribution will be <= the marginal tax on the excess contribution earnings and you get to keep the earnings in the account.

        Note: This only makes sense if at the beginning of 2018, you can roll the pre-tax earnings to a 401k, 403b or 457b. Then you can do a little to no tax liability Roth conversion immediately there after. Otherwise you are paying the 6% excise tax on the contributions and the marginal tax on the earnings.

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