Roth Earnings
Gentlemen,
Taxpayer made Roth contributions of $4,000 in 2005, $4,000 in 2007, and $5,000 in 2009 for a total of $13,000 in ineligible or excess contributions. These contributions were made prior to us managing this account. We are removing the $13,000 and the taxpayer is amending returns and paying the required 6% excise tax.
The question is what to do with earnings in the Roth IRA since timely corrective distributions were not made. There are approximately $2,200 in earnings and we have received conflicting information — some say the earnings must be distributed as an early distribution and whatever taxes/penalties apply. Others say that the earnings can stay in the Roth as a benefit for paying the multiple periods of 6% excise tax.
As always, whatever information you can provide would be very helpful.”
Thank you in advance,
Kevin
Permalink Submitted by Alan Spross on Wed, 2011-01-12 19:47
Kevin,
The latter is correct. Once the 6% excise tax is incurred because the extended due date for a timely correction has passed, the earnings can stay in the IRA. Therefore, the excise tax and distribution of earnings are mutually exclusive.
Form 5329 can be filed for each year by itself without a 1040X, and if the taxpayer took any distributions during this period OR was eligible for a contribution that was not made, the excess contribution balance would be applied in both of those cases by correct completion of the 5329. That would reduce the amount subject to the 6% tax each year, and there would also be a lower remaining excess total now.
Permalink Submitted by Kevin DeNardo on Thu, 2011-01-13 18:56
I apologize for my tardy “Thank You”
It is very nice to have an “ace in the hole’ when IRA issues arise!
Regards,
Kevin