How can I self report and undo Roth IRA contributions, due to exceeding the AGI limit?
Contributions for Roth IRAs can be made through April 15 of the following year. Without getting into philosophical arguments about dollar cost averaging, my general principle has been to put the money into the market as early as possible. Since I can contribute the money on January 1st of the tax year, I have done this religiously.
As my career and income have gone up I have been mindful to only contribute the phase out limits. Unfortunately, I had the good fortune to receive a larger than expected bonus and a larger than expected raise this year, and I will now run afoul of the AGI limits on Roth IRAs.
Before asking my brokerage firm, I would like to get some input as to the best course of action. I am afraid I created a headache for myself. I have learned my lesson and in the future will contribute the money in the following tax year since my salary is now variable to some degree. So my actual question is: How do I self report this problem and how is it possible to undo Roth IRA contributions?
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What you should do is called "re-characterization". See the instructions for form 8606 for details (that is also the form to use to report the incident). See example 3:
You made a contribution to a Roth IRA and later recharacterized part
or all of it to a traditional IRA. Report the nondeductible
traditional IRA portion, if any, on Form 8606, Part I. If you did not
recharacterize the entire contribution, do not report the remaining
Roth IRA portion of the contribution on Form 8606. Attach a statement
to your return explaining the recharacterization. If the
recharacterization occurred in 2012, include the amount transferred
from the Roth IRA on Form 1040, line 15a; Form 1040A, line 11a; or
Form 1040NR, line 16a. If the recharacterization occurred in 2013,
report the amount transferred only in the attached statement, and not
on your 2012 or 2013 tax return.
You re-characterize it back to traditional IRA contribution, which will not be deductible. You then convert it back to a Roth IRA. Basically you end up at exactly the same place, except that if you already had some gains on that amount - you'll have to pay tax on them now (for the conversion, since because of the re-characterization, it will now be gains in a traditional IRA).
You should of course contact your broker to do the re characterization (reassigning of the amount and its gains from a Roth IRA account to a traditional IRA account).
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