ROTH IRA early distribution due to excess contribution
In April of 2007, I distributed 3K 2005 ROTH IRA because I found in 2005 contribute both ROTH and Traditional.
In Jan.,2008, I got 1099-R from my custodian with code J in box 7.
I have a few questions for this early distrubition
1) Since it is early distribution, it will be taxed for 10% penalty (3K x 10% = 300$), right?
2) Should this also be added into my AGI as IRA distribution? The ROTH IRA is after tax money. If it is added to my 2007 AGI, it looks double tax for 2007 and 2005
3) Do I need pay 6% for 2005 and 2006 penalty? And report them in separate 8606?
Thanks in advance for any help
Permalink Submitted by Alan Spross on Thu, 2008-03-13 19:00
There probably will be no tax because of the Roth distribution ordering rules. Distributions come first from your balance of regular contributions, next from conversions and last from earnings. Unless you have not made regular contributions to your Roth or have already taken that amount out of your Roth, you probably have a balance of regular contributions from which the 3k was taken. You would then report this distribution on Form 8606, Part III, showing 3,000 on line 19 and 21. Your total of regular contributions to your Roth goes on line 22, and if it is more than 3,000, line 23 would be -0- and you would be done. No tax or penalty.
The J code will always show because all the custodian knows is your age and therefore J will show if you are under 59.5.
2) No double tax – see above
3) Now for the rest of the problem, your excess contribution from 2005. You do not use 8606 for that, you use Form 5329. You should file a 5329 (2005 edition) and pay 6% of 3,000, and the same for 2006, another 6%. You can send these in separately without an amended return.
The IRS may bill interest on those older years.
For 2007, you also attach a 5329, Part IV as follows:
Line 18 3,000.
Line 19 0 (but see below)
Line 20 and 21 3,000
Line 22 0 (this shows you have corrected your prior excess amount and there is no further penalty due).
Re line 19 again – if in either 2006 or 2007, you COULD have made an ROth contribution, but did not, then the 2005 excess can be applied to that contribution. This could eliminate the 6% penalty sooner. Also it could have prevented the need to remove the 3,000, but that has already passed.
In summary, your total tax would be $360 plus whatever interest the IRS bills you. They may bill it or may not bother to bill.
Permalink Submitted by paul chen on Fri, 2008-03-14 17:18
Regarding to the regular contribution, I have the following
1) 2000 year 2K in one custodian account (reported in 5498 form for 2000)
And rollover to my current custodian with value of 2114.03 in 2002 (reported in form 5498 in 2002)
2) 2003 3K
3) 2004 3K
4) 2005 3K (take out due to excess contribution—discussion now)
So my regular contribution balance should be
6K + 2114.03 (roll over value) = 8114.03
or
6K + 2K = 8K
Thanks for help
Permalink Submitted by Alan Spross on Sat, 2008-03-15 00:12
Line 22 of Form 8606 should be $11,000. The rollover does not count separately here. Since you are removing $3,000, you will have a balance left in regular contributions of $8,000 for future years.