Roth Overcontribution
A client contributed a maximum 5000 (over 50) contribution for 2007. After doing taxes, they are only eligible for $2090 in 2007. Can the excess be recharacterized as a 2008 contribution or must the excess be distributed as excess and then recontributed for 2008?
Thanks
Permalink Submitted by Alan Spross on Tue, 2008-03-11 21:19
The client can leave the excess in the Roth, and that will result in the excess being applied to 2008 by using Form 5329 in 2008. The downside is that the 6% excise tax is incurred on the 5329 for 2007 in the amount of $175. The only advantages to this would be if the earnings on the excess amount were around $700 or more, and this would also avoid having to contact the IRA custodian for a distribution. The earnings stay in the Roth. This is not considered a recharaterization.
Since the above probably is not viable, there are two other solutions:
1) Recharacterize the $2910 excess to a traditional IRA contribution. If the client is covered by a retirement plan at work, the traditional IRA contribution would not be deductible and an 8606 would need to be filed to report the added basis to the TIRA. The allocated earnings would also migrate to the TIRA. Nothing would be taxable in 2007, but an explantory statement would be added to the return explaining the recharacterized contribution. OR
2) The most common solution is to request a return of the excess contribution and earnings. The earnings are taxable in 2007 and the earnings are also subject to early withdrawal penalty if client is not 59.5. This amount could then be re applied as a 2008 contribution by the IRA custodian upon request. It is considered first a correction and second a contribution for 2008. The client just does not see the money.