Excess Roth Contribution
An individual contributed in excess to her Roth IRA for tax years 2006-2010. She caught 2010 and corrected it. I have the following questions regarding years 2006-2009:
-Would she need to amend all those returns? Or can she just file separate 5329s?
-Can she recharacterize her IRA for all those years or has the time limit for that lapsed? If that’s the case, would she need to withdraw the money and it will follow the early distribution rules? She is under age 59 1/2.
-Are there other options?
Thank you.
Permalink Submitted by Alan Spross on Fri, 2011-11-11 23:09
The old returns do not need amendment because the 5329 forms can be filed on a stand alone basis.
The recharacterization deadline has passed for all those years and even the 2010 deadline expired on 10/17/2011. There is a 6% excise for the excess contribution balance at the end of each year. The correct version of the 5329 should be downloaded and she should start with 2006 and work forward. The 5329 will credit any distributions she may have in those years against the excess contribution balance and it will also credit the excess against any eligible Roth contributions she could have made but did not, but it does not sound like this latter situation exists.
She should withdraw the entire excess balance before the end of 2011 in order to prevent another tax for 2011. She should not explain anything to the IRA custodian, just ask for a distribution of the total excess amount. The custodian and taxpayer handles these distributions like any other early Roth distribution. Any earnings on these contributions get to stay in the Roth.
There should be no tax or penalty on the withdrawal of excess contributions because regular contributions come out tax and penalty free. But she must file an 8606 with her 2011 return to show that the distribution came from her regular contribution balance, so she must determine what total amount she has for regular Roth contributions. She also needs a 5329 for 2011 just to show that the prior excess amount has been corrected. There will be no penalty for 2011.
Her total cost would be:
1) 2006 5329 – 6% of 2006 excess
2) 2007 5239 – 6% of 2006 plus 2007 excess
3) 2008 5329 – 6% of 2008 plus 2006 and 2007
4) 2009 5329 – 6% of 2009 plus 2006-2008
5) 2010 5329 – 6% of 2006-2009 (2010 was corrected earlier) Note that the IRS may bill late interest on all these penalty amounts.
6) 2011 5329 with return – no penalty, just shows the corrective amount distributed
7) 2011 8606 with return – no tax or penalty
Again, if she took any other distributions since 2006 other than the 2010 corrective distribution, those would reduce the 6% charges or eliminate them.
Permalink Submitted by Jeannine Souders on Thu, 2011-11-17 18:05
Thank you for your help!