Put too much in the Roth...now what?

So glad to find this site…was a long term lurker and occasional poster at FWF since maybe 2003 or so.

Anyway, when doing my 2016 taxes this spring, I realized that the wife and I had reached the Roth IRA contribution limit range with our MAGI.

I had already made the $5,500 contribution for each of us for 2016, so I requested a recharacterization from our broker for each of the two Roths into two new taxable IRA accounts. Not sure how I missed it all this time, but when prepping for year end taxes this year, I’ve realized that the wife’s recharacterization didn’t go through. Apparently, there was not enough liquid cash to account for gains on the $5,500 since the contribution was made, so it got cancelled. Brokerage says they sent an email about it, but it either went to spam or got inadvertently deleted. Either way, wife has too much in her Roth for 2016.

I contacted the broker to reconcile and they said I can’t fix this problem after October 15th and to call my accountant…which I don’t have.

So…what is my next move to get this straightened out? I’m sure there’s some sort of penalty involved, but not sure where to start, since I can’t start with the brokerage.

Thanks!

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The brokers are right - it’s between you and the IRS at this point. There’s a 6% annual tax on excess contributions. I am not entirely clear on this, but I think you can either remove them (with their earnings, if any) or forgo a future years eligible IRA contribution to end this. Here’s a discussion of such a situation where the account had large gains (if you have losses, your optimal strategy for addressing this may be different):

https://www.bogleheads.org/forum/viewtopic.php?t=216439

I warn you the thread got very involved, and you would probably do best to just read the replies by Alan S and the Fairmark links as a first pass.

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Thanks, @xerty. Alan S’ post says to request (just) the excess contribution (not the related earnings) as a distribution to get the contribution out and to generate a 1099-R to include in my 2017 taxes.

Did I read that right?

It seems like the brokerage would still show me with a $5,500 contribution in 2016, when I wasn’t eligible for a contribution…which I would think would/could get me in trouble during a future audit. Or am I missing something?

Yes, the last two options here are still available after your tax extension deadline has passed, either withdrawal the contribution or forego a future one:

In those cases, you’re supposed to fill out 8606 when you filed your 2016 taxes and it will show an excess contribution and the 6% tax on that excess amount. You can file (refile?) that separately from the rest of your return. If you do one of these corrections before EOY 2017, you’ll have some reconciliation on 8606 for your actions (or non-actions in the case of a reduced 2017 contribution, option#4, vs options #3 of withdrawing the contribution but not the earnings) on your 2017 8606 but there won’t be any more penalties and that will be that.

Something like this would have been possible if you’d caught this in time, i.e. before Oct 15th of the following tax year.

https://www.bogleheads.org/forum/viewtopic.php?p=3625275