Roth IRA Over funding problem
IRA Over funding problem
A client contributed $5,000 in a [b]traditional IRA [/b]in 2009. In the same year(2009), he added $5,000 to a [b]Roth IRA[/b]. He now understands he should not have done this. He has filed an extension. What are his options?
My thoughts are to take all the money that was added plus any growth on that money out of the Roth. He is very worried about the 6% over funding penalty of the IRS. Thoughts?
Permalink Submitted by Alan Spross on Thu, 2010-09-09 18:46
You are correct. When a taxpayer makes an excess contribution using both types of IRAs, the Roth is deemed the excess contribution that must be corrected. He cannot opt to correct the TIRA contribution instead. The client therefore should contact his Roth IRA custodian and request a distribution of his 2009 Roth contribution as an excess contribution. Custodian normally calculates earnings or loss.
Since he filed a timely extension, he has only 10/15/2010 to make the correction and avoid the 6% excise tax. Any earnings on the excess contribution will be taxable in the year IN WHICH he made the excess contribution. That means if he actually made the 09 contribution in 2010, the earnings are taxable on his 2010 return, not the 09 return. Early withdrawal will probably apply to any earnings.
That said, there are cases where the earnings on an excess contribution are high enough to warrant leaving the excess contribution in until 10/16. The 6% tax will be incurred, but the earnings get to stay in the Roth. He must then withdraw only the actual contribution before year end to avoid a second 6% tax. His marginal tax bracket must be considered along with the early withdrawal penalty in comparing a normal correction to leaving the contribution in and paying the 6% tax instead.
Permalink Submitted by Anonymous (not verified) on Thu, 2010-09-09 19:02
I am wondering if the contributions were made at the same institution. If yes, it seems odd that they would not have a program in place to monitor this as a “customer service” initiative.
It appears that both were made in 2009, so I would agree with Alan on every point. I would make sure that the company gets the coding right too, since the 1099-R will come out in 2011 – after the client reports the excess.
pko