IRAs

Undoing a Roth IRA

If you discover that you earned too much to qualify for a Roth, you can switch to a traditional IRA.

My son got married in 2012 and contributed to a Roth IRA. But when he and his wife were doing their taxes, they discovered that their joint income was over the Roth income limit. Is there anything he can do to avoid paying a penalty?

Yes. You usually have to pay a 6% penalty on contributions to a Roth IRA that you make when your income is too high to qualify. But you can avoid the penalty if you withdraw your 2012 contributions (and any earnings on those contributions) by April 15, 2013. That deadline stretches to October 15, 2013 if you file an extension, which can be a good idea if you're making changes at this late date. The withdrawal of contributions is tax-free, but you must include the earnings on the contributions as income for the year you made the contributions.

Or you could avoid both the penalty and the current taxes if you instead have your IRA administrator switch your 2012 Roth IRA contributions -- plus all the earnings on that money -- into a traditional IRA by October 15, 2013. If you made contributions to the Roth in earlier years, the administrator should calculate how much of the earnings in the account should be attributed to the 2012 contribution.

Most IRA administrators make it easy to "recharacterize" an IRA, which is the official term for switching from one type of IRA to another (you may need to open a new traditional IRA with the administrator if you don’t have one already). You’ll only need to recharacterize the 2012 contribution and its earnings; you can keep any money you’ve contributed to the Roth in previous years in the account.

If you’re switching the Roth to a nondeductible IRA, you’ll need to file Form 8606 to the IRS reporting the nondeductible IRA contributions. For more information, see the Instructions for Form 8606 and IRS Publication 590 Individual Retirement Arrangements. Also see The IRS Cracks Down on IRA Mistakes.

Most Popular

Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021

Recommended

Today is the Last Day to Fund Your IRA and Cut Your Taxes
Tax Breaks

Today is the Last Day to Fund Your IRA and Cut Your Taxes

Although you need to act quickly, you still have a few hours to make a 2020 IRA contribution and lower your tax bill.
May 17, 2021
9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by today's tax deadline than just filing y…
May 17, 2021
8 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

8 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 10, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021