The income attributable to (a) an excess IRA contribution , which is removed from the IRA by the applicable deadline or (b) a Roth conversion or contribution that is recharacterized by the applicable deadline
The deadline for correcting an excess contribution , or recahracterizing a contribution or conversion is the taxpayer’s tax-filing deadline, including extensions. An individual who files his/her tax return or files for an extension by the due date of his/her federal tax return receives an automatic 6-months extension to correct an excess IRA contribution or process a recharacterization.
Net income is determined by using the following formula
Net Income = Contribution x [(Adjusted Closing Balance – Adjusted Opening Balance) / Adjusted Opening Balance]
Important: The Tax Cuts and Jobs Act of 2017 repealed the option to recharacterize Roth conversions, for Roth conversions done after 2017. As such, only regular contributions to traditional IRAs and Roth IRAs may now be recharacterized.
IRC § 408(d)(4), TD 9056, IRS Form 5329
Additional Helpful Information
- NIA is not computed for IRA excess contributions removed after the deadline
- If an individual timely files his/her return without withdrawing the excess contribution or recharacterizing the conversion/contribution, and completes the transaction no later than 6 months after the due date of his/her tax return, he/she should file an amended return with “Filed pursuant to section 301.9100-2” written at the top. The amended return should include the transaction and include any related earnings for the tax year. An explanation of the transaction should also be included.
- Generally, the adjusted opening balance means the fair market value of the IRA at the beginning of the computation period plus the amount of any contributions or transfers made to the IRA during the computation period. A special rule is provided for an IRA asset that is not normally valued on a daily basis. In this case, the fair market value of the asset at the beginning of the computation period is deemed to be the most recent, regularly determined, fair market value of the asset, determined as of a date that coincides with or precedes the first day of the computation period.
- The term adjusted closing balance means the fair market value of the IRA at the end of the computation period plus the amount of any distributions or transfers (including recharacterizations of contributions pursuant to section 408A(d)(6)) made from the IRA during the computation period.
- The term computation period means the period beginning immediately prior to the time that the contribution being returned was made to the IRA and ending immediately prior to the removal of the contribution. If more than one contribution was made as a regular contribution and is being returned from the IRA, the computation period begins immediately prior to the time the first contribution being returned was contributed.