Excessive ROTH contributions
A contribution of $4,000 was made to a ROTH in 2007. As a result of an IRS inquiry, it was discovered that this contribution was 100% phased out due to AGI limitations. (The contribution was made at the time the contributing spouse was single, but she married prior to the end of the year and the MFJ AGI exceeded the phase out amount for that year). The ‘Pension Answer Book’ provides a formula for calculating earnings that seems to include unrealized gains and losses. The formula is Net income = contribution x ((adjusted closing balance FMV – adjusted closing balance FMV)/ Adjusted opening balance FMV). This results in negative earnings since the fair market value of the accounts dropped significanlty during this time period. Does this mean that less than the $4,000 excessive contribution made can be withdrawn?
Permalink Submitted by Alan Spross on Thu, 2009-04-23 19:55
It would have meant that had the 2007 excess contribution been corrected no later than 10/15/2008, the extended due date. However, since that date has now passed, the excess must be corrected under the different guidelines that apply to corrections AFTER the extended due date.
A 6% excise tax has been incurred for 2007, and that tax should be included with a Form 5329 filed for 2007. The IRS may bill interest on this tax. For 2008, Form 5329 is also used, but if she was allowed a contribution for 2008 that she did not make, the form would apply the 2007 as a 2008 contribution. They could also be in the phase out range for 2008, which would allow a partial contribution. Whatever amount was not able to be applied by contribution or other distribution taken in 2008 would incur another 6% penalty as of 12/31/2008. These same rules apply for 2009, with respect to applying whatever is less if there is “room” for them due to unused eligibility. If the amount remains unapplied, the $4,000 needs to be withdrawn as a regular contribution (without earnings formula) by the end of 2009 to avoid incurring yet another 6% excise tax.
Permalink Submitted by Maureen E. Birmingham on Thu, 2009-04-23 20:21
Thank you for your reposnse. Does the possibility exist of recharacterizing the amount that is disallowed to a non-deductible IRA if a contribution has not yet been made for 2008?
Permalink Submitted by Alan Spross on Thu, 2009-04-23 23:01
No. The option of recharacterizing as a non deductible TIRA contribution also expired on 10/15/2008. This also would have been an option up to that date, and credit for the full 4,000 original contribution to the IRA basis would have been recorded on an 8606 for 2007. But, as before, the only resolution now is to qualify to have the 4,000 applied as a later year Roth (only) contribution, or have it distributed in a regular non corrective distribution. A combination of these last two options could also work, and would be documented on Form 5329, Part IV. An 8606 would also be needed for the year of distribution, but the distribution itself would be tax free since it would come out of regular contributions.