Thorny Roth IRA Excess Withdrawal or Re-Characterization Question

[BG2008]

I'm faced with a thorny Roth IRA Excess withdrawal/Re-characterization question and I'm hoping members on the board can help with walking me through the decision matrix

 

1) I typically wait till year after to deposit money into my Roth IRA

2) Recently, I executed a trade where I was forced to deposit capital into the Roth IRA because unsettled funds can't be used to buy options (puts for hedging purposes) in the same day

3) Let's assume that the balance was $100 in my Roth IRA and I think that the balance at year end may be substantially higher, say $150-200 (strictly hypothetical, but let's entertain the idea)

4) While I'm not at the $180k contribution limit yet, but it's highly likely that I will hit that this year.  This will render my Roth contribution to be disallowed

 

My choices are a) Leave the contribution as is and wait till tax filing to determine whether I need to withdrawal the excess/re-characterize or if I can just leave the contribution as is or b) Withdrawal/re characterize today to avoid paying taxes on excess contribution.  I'm leaning towards the withdrawal/re characterization in order to avoid additional taxes. 

 

Any comments on the pros and cons of either option is greatly appreciated. 

Anything to watch out for if I do make the withdrawal/re-characterization? 

Differences between Withdrawal versus Re-characterization?

If I re-characterize, can I convert into a Roth if it turns out my income is below the $180k threshold? 

 

Many thanks!! 

 

   

[rmitz]

I'm faced with a thorny Roth IRA Excess withdrawal/Re-characterization question and I'm hoping members on the board can help with walking me through the decision matrix

 

1) I typically wait till year after to deposit money into my Roth IRA

2) Recently, I executed a trade where I was forced to deposit capital into the Roth IRA because unsettled funds can't be used to buy options (puts for hedging purposes) in the same day

3) Let's assume that the balance was $100 in my Roth IRA and I think that the balance at year end may be substantially higher, say $150-200 (strictly hypothetical, but let's entertain the idea)

4) While I'm not at the $180k contribution limit yet, but it's highly likely that I will hit that this year.  This will render my Roth contribution to be disallowed

 

My choices are a) Leave the contribution as is and wait till tax filing to determine whether I need to withdrawal the excess/re-characterize or if I can just leave the contribution as is or b) Withdrawal/re characterize today to avoid paying taxes on excess contribution.  I'm leaning towards the withdrawal/re characterization in order to avoid additional taxes. 

 

Any comments on the pros and cons of either option is greatly appreciated. 

Anything to watch out for if I do make the withdrawal/re-characterization? 

Differences between Withdrawal versus Re-characterization?

If I re-characterize, can I convert into a Roth if it turns out my income is below the $180k threshold? 

 

Many thanks!! 

 

 

 

Ran into something similar last year.  Take the withdrawal, including any gains that can be traced to the deposited money.  (as a percentage of the total based on the dates of the deposits and withdrawals).  Pay income tax on the gains. I forget exactly where it got put on the 1040.  If you have no other traditional IRAs, you can make a new traditional IRA, take no deductions for it, and roll it over into the Roth with no problem.

 

The backdoor Roth rollover is how I do all my deposits into our Roths now.