Excess IRA contributions over multiple periods

Submitted by Eric Fuhrman on Fri, 2018-01-12 18:46

Contributions were made to a Roth IRA in 2017 and 2016. 2017 taxes have not been filed. AGI levels would preclude a contribution in both years. Is it correct that the 2017 contribution can simply be distributed tax-free without removal of earnings because the tax return has not been filed. On the other hand, 2016 contribution would be treated as an excess contribution requiring remove with associated earnings, paying the 6% excise tax and filing an amended return?



Submitted by Eric Fuhrman on Fri, 2018-01-12 19:00

My sense is contributions and the associated earnings must be removed for each year regardless of whether a tax return was filed or not.  As it relates to the removal, is it necessary to separately calculate an adjusted opening balance just prior to the 2017 excess contribution and then the adjusted opening balance just prior to the 2016 excess contribution?  Would another alternative just be to value the Roth just prior to the first excess contribuiton in 2016 and then add both excess contribuitons from 2016 and 2017 to arrive at the adjusted opening balance?

Submitted by David Mertz on Fri, 2018-01-12 19:41

  • The deadline for obtaining a return of contribution of the excess contribution for 2016, the due date of the 2016 tax return, has passed.  The 6% excess contribution penalty for 2016 must be paid with an amended 2016 tax return to include a 2016 Form 5329 (if not already done).  The excess contribution for 2016 is also subject to another 6% excess contribution on the 2017 tax return which will include a 2017 Form 5329.  The 2016 excess is resolved in 2018 by taking a regular distribution of the amount of the 2016 excess contribution with no adjustment for gain or loss.
  • The deadline for receiving a return of contribution of the contribution for 2017 has not yet passed.  The excess contribution for 2017 is resolved by obtaining a return of contribution by the due date of the 2017 tax return.  The amount distributed as return of contribution must be adjusted for gain or loss.  Any gain will be taxable and, if the participant is under age 59½, subject to a 10% early-distribution penalty.

Submitted by Eric Fuhrman on Tue, 2018-01-16 16:31

Thank you for the detailed reponse.  Just for clarification, why are the earnings associated with the 2016 excess contribuiton not withdrawn?  For purposes of calculating the earnings on the 2017 excess contribuiton, I assume the beginning valuation date is the day just prior to the 2017 contribuiton? Thanks!

Submitted by Alan - IRA critic on Fri, 2018-01-12 22:08

  • Note that for years you owe the 6% excise tax (2016), the earnings are not removed. The excise tax and earnings removal are mutually exclusive. For the 2017 excess removal prior to the extended due date, the custodian will calculate allocated earnings and distribute them with the 2017 excess contribution. You will have avoided an excise tax on the 2017 contribution, and as such will owe tax and perhaps penalty on the earnings.The 2017 earnings will be taxed in the year coded on the 1099R. That year will be the year IN WHICH you made the excess contribution for 2017, and that was likely 2017.
  • There is an IRS formula for calculating the earnings and almost all large IRA Custodian will figure it using a computer program. If you want to check their math, you might pull up the worksheet in Pub 590 A and calculate the allocated earnings, but the closing value may not be known because you will not know exactly when the custodian determines the closing value. 
  • Note that instead of withdrawing the 2017 excess, you can recharacterize that contribution as a TIRA contribution, probably non deductible. If you have NO other non Roth TIRA balances, you can then convert the recharacterized contribution back to a Roth IRA tax free. This is known as the “back door Roth” because it circumvents the income limits. 
  • Yet another option is available for the 2017 excess. This one is only beneficial if you made large gains on your 2017 contribution that would be taxed and penalized with removal AND your income in 2018 will be low enough to allow you a regular Roth contribution in 2018. You would leave the 2017 excess in the Roth and file Form 5329 paying the 6% excise tax with your 2017 return. Then with your 2018 return you file another 5329 which applies the 2017 contribution to 2018. The benefit is that all your gains remain in the Roth IRA tax free. 
  • All of these choices have different results in dollar saving, transactions requested, and tax filing. You may prefere simplicity to dollars saved, and if so removal is the simplest and most straight forward. But if you made your 2017 contribution early in the year and were  in stock based investments, you may well have the large gains.

Submitted by Alan - IRA critic on Tue, 2018-01-16 17:16

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