When to pay tax on Excess Roth IRA Contribution withdrawal earnings?

Submitted by Andy Reynolds on Tue, 2018-02-13 14:47

Client 1 makes a $6,500 Roth IRA contribution on 3/13/17 for the 2016 tax year.

Client 1, then realizes he is ineligible to make said contribution due to income.

Client 1, then removes excess contribution & withdraws $58.50 (earnings on contribution) on 3/29/17 (removal of 2016 contribution plus associated earnings prior to filing taxes).

Client 1, receives a 2017 1099-R Coded 8,J with a taxable amount of $58.50.

8–Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2017.
J–Early distribution from a Roth IRA, no known exception (in most cases, under age 59½).

Question: What calendar year should the client pay taxes on the $58.50? 2016 or 2017?

Thank you in advance.



Submitted by Andy Reynolds on Tue, 2018-02-13 15:48

I think I found the answer…  “The earnings are considered earned and received in the year the excess contribution was made” (Publication 590-A top of page 45).  Therefore, these would be taxable in 2017.

Submitted by Alan - IRA critic on Tue, 2018-02-13 15:57

That is correct and the 1099R is correct. Client will report the gain on line 15b of 2017 Form 1040, and will also owe a 10% penalty on the 58.50 unless client was 59.5 (or met some other exception to penalty).

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