Several years of Excess Roth IRA Contributions

Submitted by Sarah Murphy on Thu, 2020-09-03 11:53

Hello,

I’m working with a married couple who have both made an excess Roth contribution for 2016, 2017, 2018, 2019, and 2020. No existing Traditional IRAs, so will recharacterize the 2019 and 2020, then convert back to the Roth.

For the 2016, 2017, and 2018 excess contributions – is it possible to recharacterize after paying the 6% annual penalty? Or is the only option to distribute the excess contributions? If possible, I would like to recharacterize along with associated earnings, transfer the earnings to their employer plans, then convert the after-tax money to the Roth.

As always, thank you for the help!



Submitted by Alan - IRA critic on Thu, 2020-09-03 15:11

For 2016-2018 the recharacterization deadline has passed, but if the combined excess amount is distributed before year end, because the excise tax has been incurred for those 3 years, the earnings will remain in the Roth IRA. The distribution is coming from regular contributions, so will be tax and penalty free. A Form 5329 will have to be filed for each of those years by each spouse to pay the excise taxes, which accumulate for each year. Distribution of the excess amount will end the excise taxes with 2018. The IRS may bill late interest on payment of the excise taxes.

Submitted by David Mertz on Thu, 2020-09-03 15:21

  • Since the distribution of the excess contributions made for 2016, 2017 and 2018 will not have occurred until 2020, the *2019* Form 5329 will still show these excess contributions as subject to excess-contribution penalties for 2019.  The 2020 Form 5329 will show these excess contributions as being resolved by regular Roth IRA distribution, eliminating the penalty on these for 2020.
  • Although doing so might not make sense in light of recent market gains, if any amount of Roth IRA contribution for 2019 was permissible an alternative would be to obtain a return of the permissible portion of the 2019 Roth IRA contribution rather than recharacterizing it, allowing a portion of the excess contributions from 2016 through 2018 to be applied as the 2019 contribution.  This would reduce the 2019 excess-contribution penalty, but would potentially result in gains attributable to the returned 2019 contribution required to be distributed with the returned contribution being subject to income tax and early-distribution penalty.  The excess portion of the Roth IRA contribution for 2019 would still need to be recharacterized.

Submitted by Sarah Murphy on Thu, 2020-09-03 15:43

They have filed their 2019 return already. Will the 2016 excess contribution incur 4 years of the 6% penalty, 2017 3 years of penalty, and 2018 2 years of penalty? Would amending 2019 and reporting excess contribution penalties on 2019’s return help in any way? Thanks!

Submitted by David Mertz on Thu, 2020-09-03 16:11

Yes, these excess contributions are subject to penalty as you indicated.  If the excess contributions were not already reported on a 2019 Form 5329 for each of the individuals and the penalty paid, 2019 Forms 5329 must be filed along with the Forms 5329 for 2016, 2017 and 2018 and the penalty associated with each must be paid.

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