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IRA

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Level 2

I have a client who has a Roth IRA.  He earns above the limit for a Roth, however, he contributed directly to the Roth when he should have contributed to his traditional IRA.  The Roth contribution is obviously not deductible but the amount he contributed should be taxed.  Should I put this amount as other income or is there a way in Proseries Basic to put it on the 1040 on line 4D without a 1099-R?  Do you have another suggestion? Thanks.

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11 Replies 11
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Level 15
Level 15

He needs to remove it ASAP or he pays the penalty each year until it is removed.  Form 5329 for the penalty.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 15
When it is withdrawn, there will be a 1099R for the distribution. You put it on the tax return as a pension distribution IN THAT YEAR (e. g. 2020)

ex-AllStar
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Level 2

He should never have made the contribution directly to the Roth in 2019 and he was not planning on taking a distribution from it until retirement which is many years from now.  I understand that IRA distributions are taxable in the year of the distribution but this is a different circumstance.  I am not sure I understand your answer. 

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Level 2

You are saying that he needs to remove the contribution to the Roth immediately vs tax the amount of the contribution?

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Level 15
Level 15

It wont be taxable (its not deductible) its subject to penalty until its removed.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 2

Just-Lisa-Now

His financial planner set this up as a backdoor Roth in 2018 apparently.  I did not do his taxes in 2018.  It was set up as a traditional IRA and converted to a Roth.  The traditional IRA distribution was taxed in 2018 and then converted to the Roth.  I am not a fan.

Can you point me to the reg about the penalty?  Thanks!

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Level 15

I am unclear.

2018 contributed to an IRA.

2019 converted the IRA to a Roth.

2019 additionally contributed to a Roth.

Right?

Here are a couple of references  IRS Pub 590-A, IRS Pub 590-B and my favorite, when all else fails read the instructions.


ex-AllStar
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Level 2

George4Tacks,

2018 contributed to traditional IRA

2018 converted IRA to Roth (distribution was taxed on 2018 taxes)

2019 contributed directly to the Roth (income limit too high and should not have done this)

Thanks, I will read the docs.  I read several prior and couldn't find anything that speaks to how to handle this particular situation. 

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Level 2

George4Tacks and Just-Lisa-Now,

I am going to have him call his financial planner today and remove the contribution to the Roth today so it does not incur the 6% penalty.  He can contribute to the traditional today.  In all these years, I had never encountered this situation.  Thanks.  I got it

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Level 8

If you're concerned with getting this completed before April 15th - remember IRA contribution date is also extended until July 15th.    Ask the financial planner if contribution can be moved/reclassified from Roth to traditional.   Might avoid 1099-R for 2020.

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Level 12

Too many of the terms you are using don't make sense.

This: "The traditional IRA distribution was taxed in 2018 and then converted to the Roth."

The Traditional contribution is either a pre-tax or post-tax amount. It isn't Taxed as Backdoor, unless he already had Basis (post-tax) funds in the Traditional IRA(s). That means the Distribution is partially Basis (not taxable) and partially Taxable. A true BackDoor is Post-tax going in and Not Taxed when removed/distributed/converted.

 

And you told us he put it into the Roth, but you didn't state if this was directly as a Transfer ? Or, in person, but in the timeframe so that is qualifies as a Rollover? Or, what you have is:

A Traditional IRA distribution (taxable or not, doesn't matter here) as Conversion to a Roth. In which case, you don't have to remove any funds, because the Distribution simply provided the funds for the Conversion. Nothing stated it has to be the same funds or even the same amount, for a conversion.

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