I thought I have been contributing to Roth IRA for past 3 years, but I was actually contributing to Traditional IRA. How can I fix this?

Hi,
I have been contributing my after-tax income to Traditional IRA instead of Roth IRA for past 3 years without knowing.
2012: After tax income $1000 into Traditional IRA
2013: After tax income $5500 into Traditional IRA
2014: After tax income $5500 into Traditional IRA
I found this out when I tried to do a 2015 Roth IRA conversion few days ago, and my account didn't allow me to, saying that I do not own any Roth IRA account. The reason is that, I use Charles Schwab for my retirement accounts, and Schwab uses the word 'Contributory Account', which actually means 'Traditional IRA' account.
Anyway, is there a way that I can fix this mistake? I guess the simplest course of action is to transfer all my money in Traditional IRA account to Roth IRA, but I am afraid I might need to pay taxes again for the money which is already after tax income.
1. Is there a chance that I can fix this issue? Ideally, I want all my contributions to Traditional IRA in past 3 years to be treated as contributions to Roth IRA.
2. Is there any problem with a fact that I contributed after tax income into Traditional IRA? Can I take it out without penalty since it was after-tax money? My income has been high enough for past 3 years that I do not get any tax deductible advantages by contributing to Traditional IRA.
I will be calling IRS sooner than later, but just wanted to ask question here as well.
Reply to
CL
Hi,
I have been contributing my after-tax income to Traditional IRA instead of Roth IRA for past 3 years without knowing.
2012: After tax income $1000 into Traditional IRA 2013: After tax income $5500 into Traditional IRA 2014: After tax income $5500 into Traditional IRA
I found this out when I tried to do a 2015 Roth IRA conversion few days ago, and my account didn't allow me to, saying that I do not own any Roth IRA account. The reason is that, I use Charles Schwab for my retirement accounts, and Schwab uses the word 'Contributory Account', which actually means 'Traditional IRA' account.
Anyway, is there a way that I can fix this mistake? I guess the simplest course of action is to transfer all my money in Traditional IRA account to Roth IRA, but I am afraid I might need to pay taxes again for the money which is already after tax income.
1. Is there a chance that I can fix this issue? Ideally, I want all my contributions to Traditional IRA in past 3 years to be treated as contributions to Roth IRA.
2. Is there any problem with a fact that I contributed after tax income into Traditional IRA? Can I take it out without penalty since it was after-tax money? My income has been high enough for past 3 years that I do not get any tax deductible advantages by contributing to Traditional IRA.
I will be calling IRS sooner than later, but just wanted to ask question here as well. =============== You're going to have a problem with form 8606. Since you thought it was a Roth account, you obviously weren't deducting your traditional IRA contributions. Non-deducted contributions get reported on form 8606. All three of those years are open to amendment (at least until April 2016), so that part can be fixed by filing the form (for each back year). Once you fix this, then when you convert, you file another 8606 to identify your conversion basis and all will match the IRS records. That will prevent the contributions (but not the earnings) from being taxed in the conversion.
Reply to
D. Stussy
It is too late to recharacterize your 2012, 2013 and 2014 contributions. Your stuck with the traditional IRA. See the next answer regarding your after-tax contributions.
You have not notified the IRS that you made after-tax contributions to your IRA. Therefore, at this point in time, the IRS has no record of your cost basis in your IRA. You can fix this by filing a Form 8606 for each individual year that you made an after-tax contribution. You need to prepare the 2012 Form 8606 and complete Part I; then prepare a 2013 form. It will pick up the cost basis from the 2012 form; then prepare a 2014 form 8606 that will pick up the cost basis from the 2013 form. Be sure to read the instructions for completing Part I of the 8606s. These forms can be filed without having to amend any returns. There is a signature block on page 2 of the 8606 for this purpose. You mail them to the same service center you would use if you were mailing Form 1040.
Technically, the IRS can assess a $50 penalty for each late filed 8606. So, just add a note to the package you send, that states you were under the impression that you were contributing to a Roth IRA and was confused by the terminology used by the trustee. I have never heard of the IRS assessing anyone for late filed 8606s.
Give the IRS a little time to process those forms. You can then perform a Roth IRA conversion. The taxable amount will be the amount converted in excess of your cost basis from the 2014 Form 8606.
Reply to
Alan
When you called Schwab and asked them if you can recharacterize your contributions as Roth contributions, what did they say?
Reply to
John Levine
In article ,
Why can't he do the conversion immediately? The IRS isn't informed of it until he files his 2015 return next year. Hopefully by then they will have processed the amendments to the old 8606's.
Reply to
Barry Margolin
I should have been clearer. I just wanted him to wait until 2016 for the conversion as there could be issues with the IRS not recognizing basis if the conversion took place this year.
Reply to
Alan
If "CL" had previous deductible traditional IRA contributions, part of the conversion might be taxable; he/she cannot choose just to convert the non-deductible contributions.
Reply to
Arthur Rubin

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