Roth penalties
I have a question on correcting an over contribution to a Roth IRA for 2006. I know the contribution has to be withdrawn and excise tax on the contribution paid for 2006 and 2007. What is not clear to me from my research is whether the income attributable to it needs to be withdrawn. If you know this answer, can you help me out?
Permalink Submitted by Alan Spross on Wed, 2008-02-06 01:27
The earnings do NOT have to be distributed. Corrective distribution rules include two time frames:
1) Correction prior to the extended due date – earnings must be distributed but the 6% excise tax is avoided. Corrective distributions are coded on the 1099R as such.
2) Corrections beyond the extended due date – earnings can stay in the IRA, but the 6% excise tax is incurred at the extended due date for the prior year and at each successive 12/31 that the excess remains in the account. Corrections are not coded as such but as normal or early distributions.
Therefore, if you happen to have an earnings windfall, sometimes it is better to actually NOT correct prior to the extended due date so that the earnings can stay in the IRA tax deferred or in the case of a Roth, potentially tax free.