Roth IRA Excess Contributions
I have an “excess contribution” dilemma for tax year 2007. Client’s AGI was $161,955 for 2007. The husband contributed $3,996 and the wife $4,500 (invested evenly over all 12 months). Both husband and wife are over 50 years old. We missed the October 15 deadline for corrected excess contributions. My math says that we could have contributed $3,573 per Roth IRA given their AGI fell in the middle of 2007’s phaseout limits. Where should I start to correct both Roth IRA’s?
Permalink Submitted by Alan Spross on Fri, 2008-11-14 20:57
You may not need to if their MAGI drops in 2008 and they are able to apply the 2007 excess to their 2008 contribution on Form 5329. Moreover, this does not require any contact with the Roth custodian. However, this determination needs to be made prior to year end because a 6% excise tax is incurred each year the excess remains. Failing to correct this by 10/15 means that they owe 6% on the excess for 2007 plus interest, but another 6% is incurred if that excess is still there by 1/1/09. Therefore, you need to figure if you can apply it for 2008 and if not, then remove the excess amount prior to year end to avoid incurring another 6%.
Correcting an excess contribution after the extended due date is a far different process that a timely correction. You can ignore the earnings calculation because the only distribution is the exact amount of the excess contribution. This is reported as an early distribution, not a correction. Removal is tax free since these were regular contributions, but the distribution is reported on Form 8606 and Form 5329 to show that the former excess from 2007 no longer exists as of 12/31/08.
You might also re check the allowed Roth contribution. My quickly derived figure was $2,020 for each spouse, so the wife would have a larger distribution to take if they cannot apply the contributions in full for 2008.