Roth IRA Overfunded From Multiple Years Ago – Several Clarifications

Submitted by Tim King on Wed, 2018-01-10 09:21

Hello – just now realizing that in 2010, 2011, and 2013 I contributed money to a Roth IRA when I earned too much to do so. Several questions I have to make sure I fully understand the ramifications and the possible options:

1) Confirm there are no statute of limitations in my case because I never filed 5329.
2) Is there a cap to the 6% excise tax every year, e.g. does it stop at 100% of the contribution? Or does this literally accumulate forever which over decades could be multiples of the original contribution?
3) When does a “new year” start … e.g. April 15 or Dec 31, for the purposes of the 6% excise tax accumulation?
4) On top of the 6% per year of over contributed amount, is it true I would owe the standard IRS interest as well?
5) Seems like there could be an additional 25% penalty for getting this wrong in the first place. Is this correct, and if so, is this possibly forgiven if due to “reasonable circumstances” or some similar condition?
6) Is there any merit to sending in a blank 5329 / or paying for one year’s penalty to start the 3 year statute of limitations? When would the statute of limitations begin e.g. April 15 of the year in which I filed 5329, the date that the IRS received the 5329, or something else?
7) What happens if I file a blank 5329 / or one year’s penalty and don’t hear anything from IRS after 3 years … am I “in the clear” to just keep the money in the Roth?



Submitted by Alan - IRA critic on Wed, 2018-01-10 16:11

  1. That is correct – no SOL
  2. There is a cap of 6% of the total value of your Roth IRAs at the end of the current year with respect to the additional excise tax for that current year. Otherwise, the excise taxes accumulate each year without other caps, and retroactive penalties will also accrue a late interest charge. We haven’t been seeing the IRS dredge up dated tax years, but the tax program used to file taxes will often alert the taxpayer if the contribution data has been entered into the program. These tax programs identify far more excess contribution situations than the IRS. The IRS knows this and have pledged to get their house in order – for the last several years.
  3. An additional year of excise taxes is accrued for excess amounts still in the IRA on 12/31 of each year, although excess amounts for the current or prior year can still be removed with allocated earnings up to the extended due date.
  4. Yes, if the IRS chooses to bill interest.
  5. It’s possible – there has been no IRS consistency on this.
  6. No merit of a blank 5329. To start the SOL, the applicable portion of the 5329 should include either a number or 0. A blank space does not start the SOL. Of course, if a space is completed correctly, the excise tax will be due. WIll have to check further when the 3 years starts.
  7. Not sure of your question. If you report an excess for a year and pay the indicated excise tax, the SOL will start for that year, but not for prior year excess amounts that comprised a portion of the total excess in the year you filed the 5329. In other words, if you filed a 2013 5329 and reported only the 2013 excess amount, the SOL would not start on the 2010 or 2011 years. You are in the clear for any year in which the SOL expires as a result of filing the 5329 for that year, but if the applicable portion of the form is blank the SOL will not start.
  8. Remember that there are some automatic fixes to excess amounts. Check Form 5329 Part IV. If you are eligible for a contribution and do NOT make one for any later year (or make a TIRA contribution), your excess total is reduced by the amount you could have contributed. Also, any distributions you take from the Roth will reduce the excess amount, but you have to file a 5329 for those years to document the reduction of excess.  

Submitted by Alan - IRA critic on Wed, 2018-01-10 17:05

From the IRS operations manual – the SOL for a late filed 5329 begins when the 5329 is received by the IRS. In addition, since the 5329 is considered to be a separate return for each year, it appears that the SOL is 6 years since the delinquent tax will almost always be more than 25% of what was already paid.

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