Excess Roth IRA Contribution
Hello,
I have a client that made an excess Roth IRA contribution for the 2019 tax year (he was not eligible to make a contribution in 2019). He was eligible to make the max Roth IRA contribution in 2020, but only contributed $3,600 (i.e. $2,400 under the limit). Therefore, we’d like to carry over $2,400 of the 2019 contribution to 2020 which is allowed based on IRS Publication 590 (link below). We requested the IRA custodian rename $2,400 of the 2019 contribution as a 2020 contribution, but they said they are not allowed to do this since the contribution occurred in 2019 and they can’t code it for a future year. Is there anything that the client has to do, either on the custodian side or on his tax return, to show that the excess is carried forward and counted as a 2020 contribution?
FYI – I understand that he will still be subject to the 6% penalty in 2019 since the excess was still there for 2019.
Thanks in advance for your help!
https://www.irs.gov/publications/p590a#en_US_2020_publink1000231028
Permalink Submitted by Alan - IRA critic on Fri, 2021-03-26 21:15
This is all handled on Form 5329 line 19, and is referred to as curing an excess contribution by “absorption”. The excess automatically carries forward to future years in which there is contribution “space” created by not using that year’s own contribution space. Of course, client also cannot have used up the 2020 Roth space by making a TIRA contribution for 2020.
This does not involve the Roth custodian, ie they do not reissue Form 5498 and report a 2020 Roth contribution. It is entirely resolved on Form 5329 between client and the IRS.
A 2019 5329 must be filed as you indicated to pay the 2019 6% excise tax. The 2020 5329 will absorb 2400 of the 2019 excess, leaving the difference as a remaining excess subject to 6% tax for 2020.
Client also could also request removal of the entire 2020 contribution to free up space to absorb the entire 2019 excess into 2020 and eliminate any excise tax for 2020. However, removal with earnings will result in the earnings on the 2020 contribution being subject to tax and penalty. Client could determine which costs him less by determining the amount of earnings on the 2020 contribution, and the tax and penalty for removal, and compare that with the 6% excise tax on the remaining excess.
Either way, client will lose one year of Roth contribution space after all is said and done. Same would be true if client cured the excess by taking a distribution of that excess, which will also eliminate the excess using Form 5329. It’s also possible to use both absortion and distribution on Form 5329 together to eliminate an excess amount.
Permalink Submitted by [email protected] on Sun, 2021-03-28 13:56
Great explanation. Thank you!