Excess Roth contributions
Have a client who does his own taxes. In 2011 and 2012, he contributed to Roth IRAs even though his income was far above the limit. In addition, he is an active participant in a 401k.
For 2012, I know we need to remove the excess contribution plus earnings before he files his taxes. No harm,no foul. Earnings are taxable to him in 2013, but no penalties.
For 2011, do I understand correctly that all he needs to remove is the amount of the contribution, and the earnings stay in the account? He would owe the 6% penalty. Is the penalty only on the contributions, or do we include earnings as of FYE?
He read one website that said that since he is under 59.5, he would also owe the 10% penalty for this being a non-qualified distribution. I do not believe that to be the case. Am I correct?
Last item: he asked about rolling the excess Roth contributions to a non-deductible IRA. Is that possible?
Thanks.
Permalink Submitted by Alan - IRA critic on Fri, 2013-03-15 18:36
For 2011, he owes a 6% excise tax on the excess amount only on Form 5329 with a 1040X. Any earnings stay in the Roth and only the actual amount of the excess is withdrawn. There would be another 6% due on a 5329 with the 2012 return because the excess remained in the IRA after 12/2012. May as well wait to take out the excess amount until late 2013 because the contribution can continue to generate earnings in 2013 without another tax until 1/2014. The distribution will be reported on Form 8606 and 5329 for 2013, and there is no tax or penalty for the distribution, so the website is wrong. The 2012 excess can be removed with allocated earnings up to 10/15/2013 (earnings subject to tax and penalty) but no sense in waiting to do that if that is the choice made. Conversely, the 2012 excess can be recharacterized as a 2012 non deductible TIRA contribution and reported on a 2012 8606 as a non deductible contribution. The best decision for 2012 depends on such things as what other pre tax IRA values he has, and the amount of earnings generated on the 2012 excess contribution. If the 2012 excess is removed, the earnings would be taxable IN the year the contributions were made. The earnings would not be taxable in 2013 unless the excess contribution was made IN 2013.