Excess IRA contribution converted to Roth

[cathyw]

An accountant posed this scenario to me:

His client established a traditional IRA and made a $7,000 contribution in 2022 and then converted it to a Roth IRA.  In doing year-end projections, the accountant determines that the client does not have any earned income for 2022 and therefore the IRA contribution is an excess contribution.  The current account value is $6,700.

Ordinarily, excess contributions must be withdrawn from the IRA to which made but in this case the original IRA no longer exists.  Seems the only logical thing to do is withdraw the $6,700 from the Roth IRA.  The client is going to get a 1099 for the conversion to Roth.  Since he can't claim the $7,000 as a deductible contribution (which, if it wasn't an excess contribution, would result in a wash for tax purposes) is he now facing taxable income of $7,000?  The 1099 issued for the refund of the excess contribution from the Roth is a non-taxable transaction.  Any thoughts on how this individual avoids picking up $7,000 of taxable income?

Thanks for any input.

[CuseFan]

Isn't this something the accountant should be answering, as the tax professional, rather than asking benefit plan practitioners? Unless maybe there are more knowledgeable accountants on this forum who can chime in?

[Bird]

I'm not trying too hard here but isn't it possible to un-do (recharacterize) a Roth conversion? I would look into that (get the money back into the traditional IRA) and then pull it from there as an excess contribution.

[Lou S.]

Bird, I though they made ROTH Conversions irrevocable a few years back.

I agree with Cuse fan but it seem like the conversion itself is an excess IRA contribution and you would withdrawal the excess from the ROTH under the IRA procedures +/- G/L for withdrawing excess IRA contribution before the due date of the tax return.

[Luke Bailey]

Agree with Lou S. To put another way, I think you want to end up where there the 1099-R from both the traditional and Roth custodian show Code 8 for distribution of excess contribution. Someone will have to convince the custodians.

[Bird]

16 hours ago, Lou S. said:

Bird, I though they made ROTH Conversions irrevocable a few years back.

Ah yes, I think you are right. I agree with your analysis.

[cathyw]

Thanks for weighing in.  I agree that the excess should be refunded from the Roth IRA.  I understand your suggestion re: 1099s but I think from a practical point of view the taxpayer is going to have an issue with the tax reporting. I'm pretty certain that the traditional IRA is going to issue a 1099 for the conversion to Roth ($7,000 taxable income) while the Roth IRA is going to issue a 1099 for the refund of the excess ($6,700 nontaxable income).

I guess this is now up to the accountant to either try to convince the IRA custodian to change the reporting, or wind up defending their position when IRS wants to know why they didn't pick up $7,000 in income.

Wishing everyone a very happy and healthy new year!  Thanks to all for the valuable insights provided throughout the year.