Multiple Years IRA excess contributions
I live abroad and use the Foreign Earned Income Exclusion to exclude all of my earned income. I recently discovered I am not allowed to contribute to an IRA because I do not have any other earned income. I have been contributing to a SEP-IRA (2005-2010 $27,000 total contributions) and in 2011 did a roll-over to a Roth ($27,895) and paid the appropriate taxes. From 2011-2019 I have contributed to the Roth IRA yearly the maximum amount possible. In 2017, I earned $6074 more than the FEIE allows and in 2018, $7380 more, and from now on I will have earned income so I can contribute to my Roth. I understand that the excess contributions and its earnings have to be removed. I also know I must file a Form 5329 for every year from 2005-2016 and pay the 6% excise tax.
1. I currently have $24,000 in my SEP-IRA. Since I did the 2011 roll-over, should I request for the SEP IRA contributions to be removed from my Roth account or SEP account?
2. Is my only option to request all of my excess contributions to be removed this year along with the earnings? My earnings will be taxable and subject to the 10% early withdrawal.
3. If I remove the excess contributions and earnings in 2020, are the earnings taxable only in 2020? Or do I have to go back and pay taxes on the earnings I made in each year I made excess contributions from 2005 and on?
4. Is it possible to continue to pay the excise tax but use the carry forward method and apply my excess contributions from 2005 to my eligible contributions from now on? If so, should I remove my 2019 contribution and earnings and begin to apply the excess contributions from 2019 on?
I realize this is going to be a costly mistake, so any advice to reduce my financial burden would be greatly appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2020-03-25 16:59
Situations like this where you make the same error for over a decade, and the IRS has not once sent you a notice that would have alerted you about the FEIE are gruesome and very costly to correct, particularly with SEP non deductible contributions being subject to a 10% excise tax on Form 5330. Instead of going back 15 years, you might want to compromise by simply removing your excess contributions from the SEP and Roth IRAs. That stops any more excise taxes from accruing, and it seems like are OK after 2016. It is true that there is no SOL for excess contributions, so this compromise does not technically put you in the clear or reduce the SOL to 3 years because you would not be filing Form 5330 or 5329. However, it does stop the bleeding on the prior excess amounts. Note that when excise taxes are incurred, earnings stay in the IRA accounts because removal of earnings and the excise tax are mutually exclusive. In determining the amount of your excess Roth contributions, you would count your regular pre 1917 contributions plus the amount of the conversion that exceeded the gains in your SEP IRA at the time of the conversion. If you are not comfortable with the technically correct method which requires a 5330 and 5329 for most years, I can tell you that if you went to 20 tax preparers and even the IRS, I bet that all 20 results would differ in some respect. Finally, I have involved myself in too many of these from start to finish and ended up with 20 different posts as all sorts of questions emerge regarding forms completion. Unfortunately, this forum is not intended for such long and detailed threads, and I do not have the time to devote to them. Sorry I cannot be of further assistance.
Permalink Submitted by Lori Inoue on Wed, 2020-03-25 18:36
Thank you for your insight! I have determined that my excess Roth contributions due to the conversion are $20,700. Does this reduce my SEP excess contributions ($27,000-$20,700) meaning they would be $6300? To clarify, I must file form 5330 from 2005 on and pay the 10% tax, and starting in 2011 begin to file form 5329 and pay the 6% Roth tax? 1.