EXCESS ROTH IRA CONTRIBUTIONS FOR 2015

Submitted by paul anna on Fri, 2017-09-29 13:29

I discovered recently that I made an Excess ROTH contribution in 2015 & 2016. The contributions have subsequently been removed by my ROTH IRA Custodian. After talking with several advisors, and reading IRS materials, I am still unsure of what needs to be done exactly. The best course I can determine is to file a 5329 (2015) and pay the 6% penalty. Also file a 5329 (2016) to pay 6% for the 2015 contribution that was still part of my ROTH account. I am unsure if both of my returns need to be amended. Also, the letter from my custodian stated the excess was removed as a “regular distribution”. Why? Please help



Submitted by Alan - IRA critic on Fri, 2017-09-29 17:29

  • The 2015 excess contribution had to be removed by a “regular distribution” because it was removed after the extended due date for 2015. On the other hand, the 2016 excess amount was removed with allocated earnings since that was done prior to the extended due date for 2016 (which is 10/16/2017).
  • These will be reported to you and the IRS on separate 1099R forms. You will owe taxes on the earnings returned with your 2016 contribution removal and probably a 10% penalty on the earnings. You will know the earnings amount because it is the amount returned to you in excess of the contribution. Those earnings are taxable in the year you made that contribution (either 2016 or 2017) and the code on the 1099R will indicate which year.
  • You are correct about the 2015 5329 and 6% excise tax. You also owe excise tax for the 2015 excess on a 2016 5329 because it was not removed by the end of 2016. However, you will not owe the excise tax on the 2016 excess since it was returned to you before the due date with earnings. 
  • You need to check your transaction statements to determine if what you received agrees with this since you will not get the 1099R forms till late January.
  • Since Roth contributions are not reported on your tax returns, the only reason you need to amend your return is to report the earnings as income and pay the penalty if under 59.5. That would be your 2016 return unless you made the 2016 contribution in 2017. 
  • The 2015 5329 can be sent to the IRS by itself.
  • The 2016 5329 as well unless you have to amend 2016 to report the earnings. If so, attach the 5329 to the 1040X.
  • For 2017 you will need to report the regular distribution of your 2015 excess on Form 8606, but there will be no tax or penalty. You will also need a final 5329 to show that your excess has been removed. No 6% excise tax will be due for 2017.

Submitted by paul anna on Mon, 2017-10-02 03:00

Thanks so much for the detailed breakdown. There  are two other grey areas for me. 1) the 2015 contribution had to earn something. Why didn’t my financial institution put that on the letter for that year? 2) Why does the 5329 section for excess roth contributions tell you to place the amount from line 25 on your 1040? 

Submitted by Alan - IRA critic on Mon, 2017-10-02 04:30

  1. When you owe the 6% excise tax because you removed the excess amount AFTER the due date, the contribution is removed without earnings as a normal distribution. The earnings remain in the IRA. Conversely, if you remove the excess before the due date to avoid the 6% tax, the earnings on the contribution must also be distributed and are subject to tax and penalty. Your 2015 excess was removed after the due date, therefore under the first procedure.
  2. Form 1040 is the central form and lists the various taxes due, some of which are documented in more detail, such as Form 5329. Line 59 of Form 1040 adds up all the different types of additional taxes from all the various portions of Form 5329 if you are filing the 5329 with your tax return. But you can also file it by itself if it does not affect the rest of the return you already filed. In that case, you would not attach a 1040 or 1040X.

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