Multiple excess Roth Contributions over several years

Submitted by Ronald Woody on Tue, 2014-05-27 21:39

Taxpayer’s tax preparer recently discovered that spouse had made excess Roth contributions (due to high income) for several years that had been overlooked by the preparer. Preparer and firm hired for second opinon concur that client should pay 6% excise tax beginning in the first tax year that was funded, and that client should also remove excess contributions as well as earnings which would be penalized at 10%.
Q. Shouldn’t the multiple years of excise tax penalties begin in the 2nd year, which is the time that triggered the infraction? also, since recharacterization is no longer available, doesn’t the taxpayer get to keep the gains in the account? Thanks for your help.



Submitted by Alan - IRA critic on Wed, 2014-05-28 00:01

EACH spouse that contributed made excess contributions, so this would only apply to one spouse if only that one spouse made Roth contributions. You are correct that when the 6% excise tax is due, the earnings get to remain in the Roth because distribution of earnings and the excise tax are mutually exclusive. The only year remaining in which a timely correction which includes withdrawal of earnings is 2013. All years before that are individually subject to filing a Form 5329 with a 1040X to pay the 6% excise tax, and since the excise tax is due for each year the excess remains, the amount due will increase each year a new exces contribution is made. Taxpayer should start filing out the 5329 forms with the first (not 2nd) year for which an excess contribution was made and then carry that amount to the next year’s form. Note that if any distributions were taken or any years in which spouse was eligible for a Roth contribution but did not make one will reduce the cumulative excess amount and therefore the 6% tax. If the cumulative excess contributions are withdrawn before year end, there will be no excise tax due for 2014, but a 2013 5329 will need to be filed to show that the excess has been eliminated. A 2014 8606 is also required to report the distribution of the total amount, but since these were regular Roth contributions there will be no tax or penalty for the 8606. When requesting the distribution of the total amount from the Roth custodian, no mention should be made of excess contributions, just request a distribution of the dollar amount. Finally, note that the IRS may bill late interest for late payment of these excise taxes.

Submitted by Mike Litch on Tue, 2014-12-16 21:51

Taxpayer and spouse have each been making Maximum Roth IRA contributions since 1998 through2013. They are new clients of mine and I determined that their income for 2001 through 2013 precluded them from making any Roth IRA contributions.  2012 and 2013 Roth IRA contributions were timely recharacterized as non-deductable IRA contributions.  I realize that Form 5329’s need to be filed for each year for the excess contributions and also Form 8606 in the year of the corrective distribution.  Per IRS instructions, the Form 5329 for each year is supposed to be filed with an ammended return Form 1040X. Question: For the closed tax years is the Form 5329 filed as a stand alone return?  Or, is Form 1040X filed even though the tax year is allready closed?   

Submitted by Bridget Patel on Tue, 2020-04-28 19:11

Hello, I have a client in the exact same position. This client brought over their investments from another brokerage firm. We found that they had been making direct Roth contributions since 2013 but was ineligible to make these contributions because they file as married filing separately and make more than $10 K. We recharacterized what we could but we still need to sort out the contributions made from 2013 to 2017.  I believe we need to withdraw excess contributions instead of being able to recharacterize them to an IRA but I’m not certain. Can you tell me how you resolved this issue? Thank you in advance. 

Submitted by Alan - IRA critic on Tue, 2014-12-16 22:29

  • Official 5329 Inst indicate that the 1040X needs to be filed IF a prior return for that year had been filed. However, there is no practical use for that 1040X as opposed to the simpler approach of filing the 5329 forms on a stand alone basis (but submitted together with a cover letter of explanation.) But note that these tax years are not closed for excess contributions because there is no statute of limitations for excess contributions. 
  • One option is filing them stand alone as the IRS has been accepting most of these, but if the agent that handles this happens to kick it back for the 1040X, then file a 1040X for each year and resubmit.
  • Remember that if there were any distributions taken (not corrective), the excess balance would be reduced if the 5329 is completed correctly.

Submitted by Alan - IRA critic on Tue, 2020-04-28 23:23

They will first have to determine if they can apply any of the excess as 2019 contributions if they are no longer filing MFS and have not recharacterized existing contributions for those years as non deductible TIRA contributions. If they cannot apply prior excess to either 2019 or 2020, then they need to take a normal distribution of the excess total each. After the existing excess has been withdrawn (earnings remain in the Roth ), they can prepare a 5329 each for each year starting with 2013 to report and pay the 6% excise tax for each year on the accumulated excess amount. Since the tax applies to the accumulated total, the tax will be higher each year through 2017, and will stay the same for 2018 and 2019. Finally, a 5329 will also be filed for 2020 showing that the accumulated excess has been distributed, and there will be no further excise taxes due for 2020. The 5329 Inst should be reviewed which tells what to put on each line of the 5329. There are only 4 lines, but entering the correct info is not intuitive. The IRS may also bill late interest for late payment of these excise taxes.

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