Earnings on excess Roth IRA contribution

Submitted by Greg Martinez on Fri, 2021-03-05 02:06

I am trying to figure out the earnings related to the excess Roth IRA contributions my client made. How exact does the amount have to be? Is there any repercussion for underestimating it? Is it better to overestimate it?

I’m asking because of there was also a Roth conversion involved

Balance on 1/14/20 $50,000
Excess contribution 1/15/2020 $7,000.00
Roth conversion 1/16/2020 $100,000
Contribution 2/22/2021 $7,000.00
Balance 2/23/21 $180,000

The earnings attributable to the excess contributions are
Net income = excess contribution × (ACB − AOB)/AOB where:
AOB = Adjusted Opening Balance
ACB = Adjusted Closing Balance

Would the adjusted beginning balance be $150,000? ($50,000+$100,000)
Would the adjusted ending balance be $173,000 ($180,000-$7,000)

I’m not sure if I can get the value on those specific days. The statements only have the value per quarter at the most. Is that sufficient.

THANKS!!



Submitted by Greg Martinez on Fri, 2021-03-05 02:07

The last contribution date was 2/22/21, not 2/22/20.

Submitted by Alan - IRA critic on Fri, 2021-03-05 14:35

Most IRA custodians have software that makes the earnings calculation easily, and most will not allow the IRA owner to make the calculation, although there might be a few that do, or even require that the IRA owner provides the earnings amount. If you have no choice but to provide the earnings figure, you can estimate it using the best available figures that you have. 
AOB is 164,000 (50+100+7+7)  ACB is 180,000.  Net income = 683.  Custodian should distribute 7000 + 683, and the 683 of earnings will be taxable on your 2020 return (the year in which the excess contribution was made. Custodian will issue a 2021 1099R coded P next January. P code means taxable earnings are reportable in 2020 and subject to 10% penalty if under 59.5 on the distribution date.
The formula does allow for some flexibility if there is no value available on the valuation date. You can also see that factoring in contributions made and distributions taken out are done regardless of date, so the calculation yields imperfect results.  The IRS is highly unlikely to question the earnings figure, if the amount of excess is limited to the contribution limit. There would be issues if you made excess regular contributions several times in excess of the 7000 limit.
If the Roth custodian will not do the calculation, it’s probably a small custodian, or perhaps the IRA holds non traditional assets.

Add new comment

Log in or register to post comments