Calculation of earnings for excess Roth contribution
Client overcontributed $2,100 for this year, looking to do re-characterization to non-deductible IRA. The funds were deposited bi-weekly beginning 1/4/21. IRS Worksheet #3 talks about entering FMV prior to contribution. Do I use date prior to first contribution or can I calculate each contribution separately? Thanks for response!
Permalink Submitted by Alan - IRA critic on Fri, 2021-08-27 19:27
First, IRA custodians have a program they use to determine the net earnings attributable to the contributions. The IRS formula for determining the adjusted opening balance simply adds all contributions made to the IRA over the computation period to the account balance on the date of the first contribution. This produces a single computation rather than a separate one for each contribution made, although it is obviously less accurate.
Of course, since there are multiple options for addressing excess contributions, knowing the amount of gain or loss is a factor in choosing which one to use. Therefore, in many cases it is useful to pre determine the gain/loss before deciding on the course of action. But even then the same method the custodian would use should be used. I do not think there are any custodians that would do a separate calc for each contribution date.
Permalink Submitted by Brian Murphy on Mon, 2021-08-30 13:36
That’s what I thought thank you!