I made too much in 2021 to contribute to a Roth IRA. I realized it after I filed taxes. Fidelity guy told me to recharacterize to a traditional for 2022 and that's it. I don't think that was entirely correct.

I think the following needs to get done:
-Recharacterize funds to a traditional for 2022
-Get a 1099 for 2022 taxes
-File an 8606 tax amendment form by October to amend my 2021 taxes.

Can you pros tell me if I'm on the right track or have any additional insight?

You must have also misstated your income so I would assume you'd need to refile. But the IRS is really slow to audit, unless a computer flags you you'll probably never get caught . For reference I contributed to a regular once, it was my first year on the job, I did not participate in the company 401K yet but the IRS said since it was offered I was not eligible to contribute to an IRA, they amended my refund and hit me with a nominal fine, I think it was $200 or so.

How long ago did you make the contribution? Within a certain time period, you can just ask for the money back from your broker without penalty and only be taxed on the gains (if any).

I am pretty certain you have a 6% penalty, and will every year until you pull it out.

You likely don't have any gains, so you can pull it out as an overcontribution.

You can do a recharacterization to 2022, but I am not as familiar with that. Usually, a recharacterization allows the gain to pass to the new IRA without a penalty.

You will get a 1099-R in Feb '23 for whatever you choose to do now. You would type that info into your tax planning software, and most likely, you are done. It will calculate all the penalties and taxes for you.

I don't think you have to worry about an 8606 for 2021. Once you file your 2022, it will adjust the 8606 for you.

I would strongly consider doing the backdoor Roth going forward, which the recharacterization to 2022 helps fund.

To help clarify a bit.

There are some exceptions to the things I typed and to the things I am about to type, so ask Fidelity for clarification.

The 6% penalty started April 15th and will be charged next April 15th if you don't fix it by then. It is 6% of your overcontribution.

If there is a gain since you contributed, you could have a 10% penalty on the gains (plus income tax) unless you recharacterize.

I have never tried to recharacterize a 2021 to a 2022, so I don't know if that helps avoid the taxes. This is a non issue if you lost money since you contributed. If you lost money, there isn't a tax or penalty because there isn't a gain.

The 6% penalty still stands no matter how your investments performed.

OldArmyCT said:

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You must have also misstated your income so I would assume you'd need to refile. But the IRS is really slow to audit, unless a computer flags you you'll probably never get caught . For reference I contributed to a regular once, it was my first year on the job, I did not participate in the company 401K yet but the IRS said since it was offered I was not eligible to contribute to an IRA, they amended my refund and hit me with a nominal fine, I think it was $200 or so.

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Thanks for the insight. What indicates I misstated my income though?

Aggietaco said:

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How long ago did you make the contribution? Within a certain time period, you can just ask for the money back from your broker without penalty and only be taxed on the gains (if any).

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Made the contribution in June of 2021

I dealt with this BS two years in a row. Had company stock vest at the end of the year and it pushed me over the limit.

I caught it at tax time and filed an extension so I could get it sorted, but I had already made my Roth contribution for the next year at that point, so I had to deal with that too. And worse, I had my stuff all mixed up between different brokerages, and I had pretty good gains. It is a giant pain to sort out

I did this last year when switching companies. I overcontributed by accident.

I was pissed because I couldn't correct it unless it was before Feb 14th which is ridiculous. Many forms don't even come in until then, and I didn't have everything in front of my CPA.

Regardless, you can undo pretty much anything if you have a CPA writing it all up for you.

I am not sure what the Feb 14th date is about. I think that is incorrect for an overcontribution.

If you make a 22 contribution in 2022 and fix it before 12/31/22, then it is the best and easiest way.

If you fix the 22 before tax deadline (including extensions), then it is easy, but there could be taxes and a 10% penalty. The key to this one is fixing it before you file. I am pretty sure once you file, it is too late if after April 15th.

If you don't fix it, then you are hit with 6% penalty on the amount contributed each year until you do. A $12,000 contribution for a married couple is a $720 penalty. Then, you may have taxes and penalty on the gains.

Feb 14th was some completely arbitrary date that my employer + brokerage said was the deadline to adjusting the over contribution through them.

It was ridiculous of course and I argued but....giant company HR.