Excess Roth IRA Contributions from earlier years

Submitted by John Schwarz on Thu, 2014-03-06 15:52

With a Roth IRA established in 2010 when I was already over 59 1/2, excess contributions were made in 2010, 2011 and 2012. I plan to remove those amounts from the Roth IRA now and file now the 5329 forms for each of those years in one envelope and pay the 6 pct penalty for each of those three years. Do I need to do 1040x’s as well for each year? I believe the earnings since the dates of contribution are not an issue in this case ( there is no guidance on the earnings of past years’ excess contributions in Pub 590 and the brokerage firm won’t calculate the past earnings anyway) and that the 6% penalty for each year is all that needs to be covered- correct? I will file the 2013 5329 with my 2013 return in April 2014. I will also file the 2014 form 5329 in April 2015. Right? Shall i include a letter of explanation as to what happened when I file the three 5329’s now – one in the envelope or one for each of 2010, 2011, 2012 or not at all?

With regard to the Roth distribution in 2014, will I have to do part III (“Distributions from Roth IRA’s”) of form 8606 for 2014 as the IRA is not 5 years old till after the end of 2014 and the distribution might be considered non-qualified? Will the trustee code the distribution as a taxable one that I will have to explain is a return of contributions and thus is not taxable? Is that covered by filling in on line 22 of 8606 that the basis equals the distribution amount and thus the taxable amount is zero? As I am over 59 1/2, I believe I need not fill in line 1 of 8606 as there is no 10 pct penalty for early distribution in this case.

Lots of questions for this issue.

Thanks much.

JS



Submitted by Alan - IRA critic on Thu, 2014-03-06 16:07

  • You are pretty much on track. The IRS wants the 1040X with the old 5329 forms, although there is no obvious reason that they need the X as the rest of those returns are not affected. You can enter a brief explanatory note on the 1040X itself in the space provided. You probably know that the excess contribution amount got larger each year and you owe it for 2013 as well on the accumlated excess amount. The IRS may or may not bill you for late interest on your payments for 2010-12.
  • Note the options on the 5329 under which either unmade contributions or distributions in those years would have reduced your excess balance and penalty.
  • You will need an 8606 (lines 19-23) and final 5329, Part IV (no penalty) for 2014, but your distribution should be non taxable since it is a return of your regular contributions. You will need to know your balance of regular contributions. The 1099R will not show a taxable amount. You do not need Part I of Form 5329 (you referred to Form 8606 line 1 which was incorrect).

Submitted by John Schwarz on Thu, 2014-03-06 16:21

Thank you very much for your reply, Alan. I will do the 1040x ( though I agree there isn’t much point) and write a brief explanation on each year’s 1040x form on p2. I know the amt of excess gets bigger in 2011 and 2012 but as I removed my Roth contribution for 2013 already, the cumulative amount subject to the 6 pct tax in 2013 will get smaller as I can apply what I could have done on the 5329. This year (2013), I could have contributed.’I have my total contributions for the 8606 to be done for 2014. My mistake – right – it is not 8606 but 5329 where the 10pct penalty (which doesn’t apply in this case) is calculated. sorry.  I appreciate your response.Kind regards.  JS 

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