Seeking help on calculating excess contribution earnings

Submitted by Vicky Lin on Wed, 2020-02-19 16:48

Dear experts,

I understand when a Roth IRA has excess contribution the contribution and its earnings have to be removed. I was advised to not do it myself and ask the IRA custodian to do it. I reached out to the IRA custodian, my ex financial advisor, and asked her to do the calculation. It didn’t really work out and I am looking for an alternative. Could someone make a suggestion?

Thanks,
Vicky



Submitted by David Mertz on Wed, 2020-02-19 18:08

CFR 1.408-11 describes the required calculation:  https://www.law.cornell.edu/cfr/text/26/1.408-11

Submitted by Alan - IRA critic on Wed, 2020-02-19 18:23

  • There are other options to remove the excess contribution than to distribute the earnings and these options are useful when there are large gains. Stocks are up 22% in the last year. For example, with a high amount of earnings it may be better to pay the excise tax and either just remove the exact contribution amount or assign the excess to the following year on Form 5329. However, in order to determine the best option you have to know the amount of earnings that would have to be removed if you went with the usual removal with earnings. The earnings will be taxed and subject to penalty, so you would compare those costs with the excise tax for 1 year before deciding to ask your custodian for a return of the specific excess contribution for the applicable year with earnings. 
  • Also note that if you have the contribution returned with earnings, the earnings are taxable in the year IN WHICH you made the contribution. So if you made a 2019 contribution in early 2020 and had it returned, the earnings would be taxable in 2020, not 2019.
  • Sometimes, if you have done rollovers and transfers from the account to which you contributed, your current custodian will request certain info, or even might ask you to do the calculation and provide them with the figure, because they do not have the info needed to run the calculation.

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