Inelgible Contribution to a Roth IRA
If an person makes a 2019 Roth Contribution that they determine is ineligible because their income exceeds the allowed amount, can the person withdraw the contribution without penalty?
I believe they have until their tax filing date (April 15th of the following year) to make the correction without incurring a 6% penalty, correct?
Permalink Submitted by Alan - IRA critic on Tue, 2019-07-09 17:34
They can have the excess contribution returned with allocated earnings up to their extended due date (usually 10/15/2020). The earnings would be taxable and subject to penalty. Another alternative is to recharacterize the Roth contribution as a TIRA contribution, but that contribution would typically not be deductible and would have to be reported as non deductible, but no current taxes are due and no distribution takes place. Yet another option in the event of a huge gain on the contribution is to leave it in the Roth until after 10/15/2020, then withdraw just the contribution. You would owe the 6% excise tax, but the gain would remain in the Roth IRA and eventually be tax free Roth gains. And if the person expects to be eligible for 2020 (income low enough ) they could leave the contribution in the Roth and file Form 5329 applying the contribution to 2020. The 6% excise tax would also be due in this situation for 2019. Removal of the contribution with earnings and paying the excise tax for a contribution are mutually exclusive, but if the gain is large enough the excise tax could be less than the ordinary tax on the gains plus penalty on the gains. So 4 different options here depending with the best choice depending on other variables.