Roth IRA Excess Contribution FIX BACK to Roth IRA - YouTube

in this video, I'm going to talk about a Roth excess contribution being re-characterized back to the  

traditional side as a non-deductible contribution  and then back to the Roth with a backdoor  

Roth conversion. What's going on guys welcome  back to the channel or if this is your first  

time on our channel welcome to the  channel my name is Travis Sickle

and here is where this question is coming from  today it is a question from drone and video az  

maybe you can help me I contributed to a Roth IRA  and I have a workplace 401k I made with selling of  

stocks over what is allowed to put money into a  Roth but I did contribute to one during the year  

can I move this to a traditional ira and then  take it as a tax deduction subscribe thanks for  

any help so here is what you need to consider  there's actually a handful of things first can  

you do the re-characterization the answer is yes  you have an excess contribution to the Roth IRA  

but you want to do it as a re-characterization to  the traditional side so you don't have any taxes  

or penalties now pulling the money from the roth  over to the traditional side as a non-deductible  

contribution you're also going to have some  gains in there or maybe you'll have some gains  

that has to go with your contribution so let's say  that you put in $6,000 into the Roth IRA you realize  

you couldn't do it it's an excess contribution  you got to pull the money out but let's say in  

this example that it grew by a thousand dollars  so you have seven thousand dollars inside of your  

Roth IRA that needs to be converted over to the  Traditional side now the $6,000 is going to get  

converted but it would be as a non-deductible  contribution now you have a workplace plan  

so it's likely you're earning too much to make a  traditional contribution and if we just look here  

at the limit for single covered by a workplace  plan $66,000 to $76,000 so if you're making over  

$66,000 you can't make the full contribution in  2021 and for 2022 that's going up to $68,000 to $78,000  

this is the phase out to make a contribution into  your traditional IRA if again you have a workplace  

plan so it cannot be a pre-tax contribution so it  will be non-deductible now the earnings on that  

is going to be taxable but now it's sitting  in the traditional ira so when you do the  

conversion you're going to get hit with the  pro rata rule unless you pull those earnings  

out now you have a couple of options you can  pull the earnings out and put them into your  

workplace plan if your plan allows it that is  separating the money from your Traditional IRA  

leaving you with only non-deductible contributions  unless you also have other contributions or an  

old ira because they all get aggregated you  have to add them all up but if you don't have  

any of the traditional ira money it's only  the non-deductible money and you do the  

conversion not going to be taxable so really  you're just pulling the money from the roth  

assuming there's no growth or losses and you're  putting it over as a non-deductible contribution  

and then you're going right back to the roth so  there's a couple of things that you need to know  

here is when you're doing the re-characterization  there's going to be no taxable events no penalties  

because you're doing the re-characterization  within a timely manner meaning you're doing  

it before the tax filing deadlines including  extensions then you can put it over to the  

traditional side the original contribution will  be as a non-deductible contribution and there  

will be earnings but when we go back over to the  Roth in a backdoor Roth conversion it is taxable  

in the year that you're doing that conversion  so if you're doing it in 2022 even though it  

was a 2021 contribution when you're doing the  conversion the conversion will be under 2022 taxes  

now just something to note that you're gonna get a  whole bunch of tax forms including 1099-R for all  

of the distributions and the re-characterizations  and of course the contributions that has the form  

5498 so just be aware of these transactions as  you're doing your taxes work with your accountant  

your CPA while you're going through this just to  make sure it's reported correctly but it's not  

well it is a headache it's not that big of a  deal it can be fixed it is a headache though  

and you need to make sure that you're doing  it correctly because like i said going from  

the raw side to the traditional ira and then back  you're going to get hit with stuff like the pro  

rata rule or additional taxes on the conversions  because that conversion is going to have the pro  

rata rule and even if you just have the original  contribution and the growth portion then you're  

going to want to convert all of it at the same  time in order to get all of the non-deductibles  

all the non-deductible contributions back  to the raw side so a bit of a headache but  Roth

get through it to make sure that you can fix it  because the last thing you want to do is just  

do the re-characterization leave it because you  don't want to deal with the pro-rata rule or you  

don't want to deal with having to take money out  of the ira into your workplace plan or solo 401k  

or what have you go through those motions because  it will only make the problem significantly worse  

the longer that you wait for the non-deductible  contribution converting it over to the Rothroth side  

so hopefully this has helped i know it's a  complicated situation and it really draw it  

out in this video but if you have any questions on  it let me know in the comments down below and if  

you've enjoyed this video be sure to subscribe  and leave your comments down at the bottom