Excess Back door Roth Contribution

[nolanm]

Hi all

I have a client who did 2x back-door Roth contributions in 2020. He earns too much for regular Roth contributions, He contributed twice after tax to an IRA, then rolled $6k into a Roth in May, and $6k into a Roth in December, 

I now have 2 x 1099's showing the distributions from the IRA's in 2020. 

I can enter the 1 x $6000, and designate it as a back door to make it not taxable. 

What do I do about the 2nd contribution made in Dec 2020, and the 2nd 1099.

Thanks for the help

Nolan Menachemson 

[qbteachmt]

"He contributed twice after tax to an IRA"

That's the question; was that Allowed or not? You had to qualify for this step.

The "backdoor" simply is a Conversion. The entire IRA (or even, all funds in all IRA) can be converted. There is no limit on conversion.

[nolanm]

ok, so he is limited to contributing $6k p.a. to an IRA. And he did 2x $6k = $12k. 

So how do I treat the 2nd 1099 for $6k.

Everything I am reading says he has to withdraw the "excess" $6k before 4/15 to not incur a 6% penalty.

But will the plan administrator will only generate a 1099 showing the withdrawal from the Roth next year, as a 2021 action.

The question remains how do I treat the 2nd 1099 in his tax return for 2020?

[qbteachmt]

"he has to withdraw the "excess""

It wasn't an Excess contribution to Roth; it was a conversion. A failed conversion, as in, not allowed; because the Traditional IRA contribution was excess.

I found this article for you:

https://www.thetaxadviser.com/issues/2020/apr/correcting-excess-contributions-iras.html

[rbynaker]

Is there any chance that the May conversion was a conversion of a prior year IRA contribution?  i.e. made 2019 contribution on 4/15/2020, converted in May 2020.  See if the client has any 5498 forms for 2019.

[qbteachmt]

"See if the client has any 5498 forms for 2019."

And to clarify: Because the 2019 tax filing date was extended so far into 2020, the 5498 issued for a 2020 payment made against tax year 2019 based on the 2019 tax form filed in 2020 likely was made available or mailed in August of 2020. A lot of people never make a point of getting that updated form or looking at the tax year it is for.

[nolanm]

Thank you sir. Reading, and re-reading the article.

So it looks like we have to withdraw the $6k from the Roth through a corrective distribution. Not too worried on tax or penalties on earnings on the $6k as these earnings are very small. 

And the IRS still gets 2x 1099's so I still have to show both in his return. Do I show the corrective distribution in his 2020 tax return, which explains to the IRS the $12k instead of $6k on his 1040?

Also does this cure the excess contribution that occurred in the post tax IRA? This IRA is now closed as we set it up only for the back-door.

Maybe questions to Intuit themselves, and / or the plan administrator - though the the plan is at a broker dealer, not a retirement plan company. They have not been helpful. 

Any further insights much appreciated. 

Thanks Nolan

[nolanm]

Got it will check for 5498 forms

[nolanm]

Problem is that we rolled his IRA's and Roth's to a new firm in August. That is why I am concerned that it is a duplication as the new firm had no records of previous IRA activity. 

[qbteachmt]

"as the new firm had no records of previous IRA activity."

But the Client should. 1099-R is money Out reporting. 5498 is money In reporting. Account statements will show the activity, too. And the IRS has the transcript of these reporting forms. You are lucky; this is only a year or so back. I've had to go back much further when helping clients.

[qbteachmt]

Wait, now I'm confused...

"He contributed twice after tax to an IRA, then rolled $6k into a Roth in May, and $6k into a Roth in December,"

When were the contributions made? "Backdoor" typically means the conversion was right away. It also means Nondeductible contributions to the IRA. And this doesn't identify if there is also other deferred accounts, or basis in them.

"Also does this cure the excess contribution that occurred in the post tax IRA? This IRA is now closed as we set it up only for the back-door."

"Backdoor" is how someone making too much to contribute to Roth (a nondeductible contribution activity) would do the same into a Tradition IRA account and quickly convert that to Roth. But the process still is Conversion, and if there are other Trad IRA accounts, then the Nondeductible amount (which would become Basis) is taken into consideration for pro rata taxes. In other words, "backdoor" is used to mean "nontaxable" but it isn't always true, along with "bypassing the Roth restriction." A common error is thinking Backdoor = "I converted all of one account" but that isn't what the IRS regulations define.

"Problem is that we rolled his IRA's and Roth's to a new firm in August."

Then the Dec activity is in that new Firm's account transactions. And now you point out there are Other Trad IRAs?

"But will the plan administrator will only generate a 1099 showing the withdrawal from the Roth next year, as a 2021 action."

Not if the conversion was in 2020.

You really have the following: Get documentation to sort out what happened for which tax year in which activity year.

If there are other Traditional IRA accounts with balances at the time of these Conversions, that would be pro rata taxable, so make sure this is reported correctly. And this means there is Trad IRA from which to remove "excess." That means the Roth Conversions would be Fine.

You might need to seek out more experienced help and get mentored on this one.

"The question remains how do I treat the 2nd 1099 in his tax return for 2020?"

So, there are 2 for 2020? But that is the money Out. The tax year the contributions apply to will be 5498 money it, and last year's 1040, and the year earlier, would be helpful.

[nolanm]

I have his 2019 return and broker A 1099 statement. He did $6k backdoor , broker A generated a 1099 with $6k into IRA and immediately into Roth. So 2019 looks fine, no other IRA balances.

For 2020 I receive 2 x 1099's. Both say for 2020 tax year - so can this refer to a 2019 contribution? I don't believe so. 

Sequence is:

in May 2020 he contributes $6k post tax into traditional IRA, immediately backdoors into Roth. I had no idea till received 1099 today. Broker A generates a 1099, looks the same as 2019 above, but says 2020 tax year. 

Then comes to my firm for tax and investments. Rolls Roth money to my company.  In Dec 2020 he says lets do $6k back door.

I open IRA, fund  it post tax, back door it immediately into the Roth he moved over to me.

He has no other IRA balances. So no aggregation or basis issues that I can see.

Today I get a 1099 from broker A and one from my firm each showing $6k into IRA and then into the Roth's a day later.

My concern is that both 1099's go to IRS and I have to show $12k on his 1040, and code it in IRA works as non-taxable.

From what I read I need to reverse the $6k from the Roth as a corrective distribution. This will, however, only generate the 1099 distribution form in early 2021. I am not sure how/where to enter into Intuit the corrective distribution so that the IRS does not start the clock on the 6% penalty for excess contribution. 

Not really following how 5498's drive the contributions as that's money in. If i have 2x 1099's showing $12k into IRA's - is that not a problem for the IRS?

Thanks again

[qbteachmt]

"in May 2020 he contributes $6k post tax into traditional IRA"

Stop here. Do you know which tax year this is contributed for? Did you get the 5498 from mid-2020 for tax year 2019 from the client?

"Not really following how 5498's drive the contributions as that's money in."

That's where you start. Nothing you stated makes it clear that you Confirmed you have 2020 over-contributions. You only described Distribution activity.

Have you confirmed if the May 2020 contribution is for tax year 2019, paid in by the tax return filing due date, which was July 15th of 2020? Did you get the 5498(s) for 2019 and for 2020 (and for 2019 it might have been re-issued as Amended late in August)? That's how you determine which inflows belong to which tax year.

As @rbynaker  pointed out, May 2020 could have been against 2019 tax filing year and Dec 2020 could have been Fine for 2020 and just Earlier than this client typically funds their retirement. A client who always waits until their tax return is ready, to fund their retirement account for the tax year being Filed, needs to know to get the Amended 5498 later that year, and give them to you. Did you ask if they typically wait, but decided to work with you Dec 2020 in advance of their 2020 tax filing prep?

You might not have any over-funded condition at all.

"If i have 2x 1099's showing $12k into IRA's - is that not a problem for the IRS?"

No, there is no Problem here. If there had been two conversions from the same broker, there would be 1x 1099-R. There will be as many 1099-R as there are brokers where funds were taken Out, and the amount(s) can be $12 or $1.2 million. It's just money Out. It's just Information. It's your job to show on the tax form if there is further action taken.

Let's review "backdoor" Roth:

You don't qualify to contribute to Roth, but that's where you want to invest, so you put a Nondeductible post-tax amount into a Traditional IRA account. The intent is to use the Back Door to sneak money into a Roth.

At some point, you Convert some amount to Roth. It doesn't have to be right away. Even if it is, it won't be considered the exact same money. It's only considered to be the same money, when there are No Other Accounts that are Traditional IRA or other deferred type.

It won't be a taxable conversion if you have no other funds in any other deferred account (or, only basis in them) or plan (avoids triggering the pro rata tax computation) and if you convert right away (so that there are no earnings on which you need to pay taxes). Because any conversion, whether related to Back Door or not, is going to be computed for tax purposes as pro rata to basis. If I put only nondeductible money into a Traditional IRA and do not invest it, so it just sits there with no growth, I can convert it to Roth at any time tax free; backdoor or not, it's just Conversion with nothing to pro rata compute.

"we rolled his IRA's and Roth's to a new firm in August."..."He has no other IRA balances. So no aggregation or basis issues that I can see."

Which is true? If there are no other accounts, and if you confirm that too much was contributed for 2020, you have to remove it from the Roth.

https://www.irs.gov/pub/irs-pdf/i1099r.pdf

And if so, I would confirm if you might still be within the 60-day rollover period, to Remove this from Roth, back to an IRA and then do a new conversion for 2021. Because if you confirm both May 2020 and Dec 2020 deposits are for the tax year 2020, that makes Dec the excess and the rollover makes it a wash event.

I recommend finding someone locally to review all of this with you and with the paperwork that matters.

[nolanm]

Thanks sir for all the help. tbc on my end