Help Please: What steps do I have to take to fully address Excess Roth IRA Contributions made for the 2015 Tax Year?

Submitted by Austin Lin on Tue, 2017-03-07 05:02

Hello,

As part of filing our 2016 1040, I just realized that our household AGI in 2015 was too high to contribute to a Roth IRA.in 2015…although I did contribute the $11,000 maximum ($5500 each) unfortunately :-(. Since I’m past the October 2016 penalty free re-characterization period for 2015, I am trying to find out what exact steps I have to take to make this right and limit my 6% penalty to just 2015, if possible. I have 6 questions (Q1-Q6) embedded below as part of describing my situation.

I found two different solutions described below which sounded somewhat easy to follow, but I’m not sure if EITHER is correct. (Q1) Can you please let me know if either of these options are actually valid and assuming they are NOT valid, can you please tell me what are the actual correct steps I have to take to address my excess 2015 Roth IRA contributions?

1. I started trying to figure this out by calling Fidelity which holds my IRA. They said this required a Tax Advisor so they suggested I call H&R block or some other tax advisory firm. H&R block said…”File a 1040X for 2015 and indicate (somewhere, not sure where?) that my maximum allowable 2015 Roth IRA contribution was $0.00 instead of the $11,000 (for myself and wife) that I actually (incorrectly) contributed, so that when I withdraw the earnings on the 2015 in the future (after 59.5?), the IRS will know that I should actually get taxed on those 2015 Roth IRA earnings (sort of like a non-deductible Traditional IRA?) instead of being able to withdraw those earnings on the 2015 Roth IRA tax free as would normally be the case for a Roth IRA at age 59.5.” (Q2) Is this H&R Block information a valid solution?

2. In addition to checking with H&R block I surfed the internet a little and found the site/link below.
http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/excess-contributions-to-roth-iras/
The last paragraph of this site/link, says…”Contribute less than maximum. The last way to correct an excess contribution is to contribute less than the maximum in a subsequent year. For example, if you have a $2,000 excess contribution in 2014 and you contribute at least $2,000 less than the maximum you’re allowed to contribute in 2015, you’ll incur the excess contribution penalty for 2014 but not for 2015 or later years. The nice thing about this particular method of correction is that it sometimes happens purely by accident: people sometimes discover an excess contribution from a few years earlier and find that it was automatically corrected in a subsequent year when they contributed less than the maximum.”

(Q3) Is this correct? If so, then it would seem to suggest that all I would have to do is call Fidelity and have them EITHER fully withdraw my 2016 $11,000 Roth IRA contributions or maybe better yet recharacterize them to a non-deductible Traditional IRA and pay the 6% penalty for 2015 only through the 5329 form? (Q4) Also, if this is a valid solution, is it correct that I would NOT need to amend my 2015 Tax return with a 1040X and I don’t have to withdraw my 2015 Roth IRA contributions either?

(Q5) Assuming I do have to complete a 5329 at some point to pay the 6% penalty for the 2015 excess contribution, how do I do that exactly? (Q6) Is the 5329 a standalone form that I submit directly to the IRS or is that only submitted as part of filing a 1040X for 2015 or part of submitting my 1040 for 2016?

Thank you in advance for any information you can provide me!



Submitted by Alan - IRA critic on Tue, 2017-03-07 16:28

  1. Point 1 is mostly incorrect. You need to file a 5329 for each of you for 2015 and pay the 6% excise tax. The earnings on these excess contributions stay in the Roth accounts because you did not withdraw the excess by the extended due date. The earnings are just like any other Roth earnings and will not be taxed once the Roth is qualified.
  2. Point 2 is correct, but Form 5329 should be correctly completed to show that the excess was applied to a later year in which you were eligible to contribute to the same IRA type, but did not. There is no excise tax starting with the year that the excess can be applied to.
  3. If you have also made 2016 Roth contributions for which you are eligible, you could request a return of those contributions with earnings to free up space to apply the 2015 excess on Form 5329 for 2016. You cannot recharacterize because you cannot contribute more than 5500 total for a year, so a TIRA contribution would leave no space to apply the 2015 Roth excess. That would eliminate the excise tax for 2016. Gains returned are taxable in the year the 2016 contribution was made, so if you made them in 2016 better get them removed so you can file the 2016 return reporting those earnings. If you have already filed 2016, you would have to amend it. For 2015, you only need to file a 5329 each to pay the excise tax, and you do not withdraw the 2015 excess if you can apply it to 2016 by creating room for it. Just be totally sure your income is not too high in 2016 to qualify for Roth contributions.
  4. See above
  5. The 2015 5329 forms can be filed stand alone. Send the excise tax with them for each of you. The IRS may or may not bill late interest due to late collection of the 2015 excise tax.
  6. 5329 can usually be filed stand alone. But every so often the IRS will request a 1040X with it. So you also have to option of filing a 2015 1040X and attaching both 5329 forms to it. There is space to explain why you are filing the 1040 X. No need to explain that you applied the excess to 2016. Your 2016 return should include an explanatory statement about the return of your 2016 contributions with earnings, and will include paying tax on any earnings and penalty on the earnings.  Your 2016 5329 forms will be included with your return and will show that you applied the 2015 excess as 2016 contributions leaving no excess at the end of 2016.
  7. In the end, you pay excise tax for 2015 only. You pay tax and penalty on the earnings returned on your 2016 return IF you made those contributions in 2016.

Submitted by Austin Lin on Tue, 2017-03-07 17:48

Thank you very much for the reply and information. Your solution makes a lot more sense.  H&R Block’s solution seemed to good to be true. 🙁  :-)I’m assuming the answer to my follow up question below is “No”, because I missed the October 2016 recharacterization period AND I missed the December 2016 late withdrawal option, but just to make sure I understand all my options…Is there any way at this point that I can turn the excess 2015 Roth IRA contribution into a Traditional IRA contribution for 2015…maybe by withdrawing the 2015 Roth IRA contribution, paying the 6% penalty, paying tax on any earnings on the 2015 contribution, paying the penalty for early withdrawal, and then somehow indicating on a 1040x for 2015 that I made a non-deductible Traditional IRA contributions and tracking it through an 8606?  I was trying to figure out if there was any option at this point to keep my Roth IRA 2016 contribution intact and still have an IRA of some sort for 2015, in this case a non-deductible Traditional IRA for 2015?Of course, having just re-read what I just wrote, besides probably not being an option at all, that seems way more complicated and potentially more expensive than just withdrawing the 2016 Roth IRA contributions to absorb the 2015 excess, paying the penalty on early withdrawal and earnings on the 2016 contribution, and paying the 6% penalty on 2015.Thanks again!

Submitted by Alan - IRA critic on Wed, 2017-03-08 21:14

No, you cannot change the 2015 contribution after 10/15/2016. You will have to either withdraw the excess or create room to apply it as your 2016 contribution on Form 5329. Either way, you will effectively miss out on a year’s IRA contribution.

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