Roth ira phase out

[KC-CPA]

I have a MFJ client whose income increased $60k, so now his income is $195k, he (taxpayer) and his wife (spouse) contribute to a Roth IRA $2,400 each year, so between them $4800. The income is all his and he has a retirement plan available at work, the wife stays at home and has no income.

As always client speaks of how easy their return is, which it is, except for this little hiccup with the phase out of ROTH contribution already placed in the ROTH IRA account.

Since they did not exceed the contribution limits, there are no excess contribution penalties that would be calculated on form 5329, correct?

Because of income, neither the taxpayer or spouse can contribute to a ROTH, even though they already did, however, could they just recharacterize the amounts to a non-deductible traditional IRA, how would they do this? Does form 8606 need to be completed? Since we have not hit the tax filing deadline for 2014, is it necessary to fill out any forms?

Just looking for best strategy and direction to "undo" their ineligible ROTH contribution. I guess the good news is that this is the first year, but I will need to provide them direction for future years, he believes his income is not going to be that high in future years.

Thanks for your input.

[kathyc2]

If they leave the money in the Roth 5329 is required this year and every year it remains there.

If they convert to non-deductible IRA 8606 is required. Conversion is handled by the company that holds the IRA.

They can then convert the non-deductible back to an IRA. A word of caution: if they have other money besides this in non-deductible IRA's the results of converting back to a Roth can have unexpected consequences.

They can also withdraw the excess contribution by the due date of the return. Next year they will receive a 1099R and will pay tax on what the contribution earned.

[Burke]

Also, I am assuming that these contributions were made in 2014? If they were not made until 2015, they can just designate them as 2015 contributions.

[KC-CPA]

Yes, they contributed them in 2014

[KC-CPA]

If they leave the money in the Roth 5329 is required this year and every year it remains there.

If they convert to non-deductible IRA 8606 is required. Conversion is handled by the company that holds the IRA.

They can then convert the non-deductible back to an IRA. A word of caution: if they have other money besides this in non-deductible IRA's the results of converting back to a Roth can have unexpected consequences.

They can also withdraw the excess contribution by the due date of the return. Next year they will receive a 1099R and will pay tax on what the contribution earned.

So, when you say convert to the non-deductible back to an IRA - is that the same as a recharacterization?

I talked to the client and he wants to make the contribution a non-deductible IRA and then convert to ROTH, can they do all at the same day, or is there a timeframe.

Thank.s

[kathyc2]

So, when you say convert to the non-deductible back to an IRA - is that the same as a recharacterization?

I talked to the client and he wants to make the contribution a non-deductible IRA and then convert to ROTH, can they do all at the same day, or is there a timeframe.

Thank.s

Sorry, I see I made a typo on earlier post: "A word of caution: if they have other money besides this in non-deductible IRA's the results of converting back to a Roth can have unexpected consequences." This should have read if they have other money in a TRADITIONAL IRA not a non-deductible.

The following article does a better job explaining it than I can: http://www.marketwatch.com/story/bac...ree-2013-04-30