Small Excess Contribution
This is one of those scenarios that almost isn’t work looking at, but is just an annoyance on the tax return. I have clients who each have $140 in excess Roth contributions from many years ago. This predates our relationship. For 2024, the qualified to, and maxed out their Roth’s. In hindsight, we think they could have contributed $140 less to their ROTH’s, and then reconciled on FORM 5329 line 19 to use up the $140 excess, removing all excess. Is this accurate?
However, since they did fund, is it better to take this approach for 2025? I don’t really want to hassle with any removals for 2024. What would you recommend?
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-21 13:11
The technically correct answer is to file a 5329/1040X for every year starting with the excess year and pay the 6% excise tax until the excess is either distributed or absorbed by unused contribution space. If 5329 forms have been filed in the past to pay the 6%, the IRS knows there is an excess and it should be eliminated in either 2024 or 2025 and reflected on the last 5329 forms.
But if no prior 5329 forms were ever filed, a possible (but not technically correct) compromise approach is to have each contribute 140 less in 2025 but not bother with a 5329. In that situation, at least adding additional excise tax years will end, but no 5329 will be filed to document the absorption.
SOL for excess IRA contributions are unlimited for tax years 2021 and prior without a 5329 filing, but 6 years based on the Form 1040 filing starting in 2022. The IRS has ruled that the new SOL is not retroactive to years prior to 2022, the year of enactment of Secure 2.0 Sec 313.
In summary, I think you should consider how far back the original excess was made, and what has been filed since that time.
Permalink Submitted by Krista McBeath on Thu, 2025-01-23 15:45
Alan,
The 5329 has been properly filed each year. They are paying the excise tax on $140 each year. Once of my advisors wanted to ask the custodian to move $140 of the 2024 contribution to 2025. I shared that I didn’t feel that was possible- or at least not work the work, given that the contribution was made in July. Their hope was to reduce the contribution by $140, by moving it to 2025, and using up that absorb the $140 on the 5329. Seems like so much work for $140 when this could all be accomplished on the 2025 return but contributing $140 less.
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-23 16:29
Yes, reducing the 2025 contribution by 140 would erase the excess by filing a 2025 5329. Another way to erase the excess in 2025 would be to take a distribution of 140, as that would likewise correct the excess on Form 5329. But contributing 140 less is easier since that’s only one transaction and will not generate a 1099R.
With respect to re assigning a contribution year by the custodian, that can only be done for contributions made from 1/1 to 4/15 which can be timely contributions for either the prior year or the current year. A contribution made in July is only timely for the current year, and therefore cannot be reclassified by the custodian.