Removing excess Roth contributions

Submitted by Robert Roselli on Fri, 2022-08-19 18:53

I need to remove excess Roth contributions. The formula is straightforward. It’s the adjusted closing balance-adjusted opening balance/adjusted opening balance. You take the calculation and multiply by the excess contribution.

In my case, the client contributed $ 7,000 on 3/7/22. He had a rollover (funds were previously held in a Roth 401k) on 6/27 for $ 114,319. Now, we are removing the excess on 8/19/22.

Since there is an additional contribution between the Roth contribution and removal. How should the earnings be calculated?



Submitted by William Tuttle on Fri, 2022-08-19 19:45

Just request removal of the excess contribution and associated earnings. The custodian’s platform is engineered specifically for this purpose.



Submitted by Robert Roselli on Fri, 2022-08-19 20:11

I did, but they are coming up with a number that doesn’t make sense. I was asking this for the conceptual reason of how the additional rollover factors into the calculation.



Submitted by David Mertz on Fri, 2022-08-19 23:03



Submitted by Alan - IRA critic on Sat, 2022-08-20 00:23

Due to the rollover being included in the adjusted opening balance, but was not in the Roth IRA during a period of market losses while being added in late June may have resulted in gains on the rollover amount. If the rollover amount is large compared to the rest of the Roth IRA balance, the calculation might correctly generate more gains on the excess amount than expected. The statutory formula does not always produce equitable results in a situation like this.



Submitted by David Mertz on Sat, 2022-08-20 02:34

  • That’s a good point.  Of course it just as possible for opposite to occur under different circumstances.  If the market increases substantially between the excess contribution and the rollover and then the market drops, it’s possible that there would have been a gain if the rollover had not been done gets but gets turned into a loss when the rollover is factored in.  If there is no change in market value after the rollover, the rollover would just dilute the net gain or loss.  One might use this to their advantage by just before doing the return of contribution  intentionally doing a transfer or rollover into the account to which the excess contribution was made to dilute what would otherwise be a larger gain.  (Diluting a loss would probably not be advantageous.)
  • If there is a substantial gain, one might instead pay the 6% penalty on the excess contribution and correct the excess contribution by a regular distribution after the due date of their tax return, allowing the gains to remain in the Roth IRA.


Submitted by Robert Roselli on Sun, 2022-08-21 13:51

Thanks for sending this. Articles from sources like the Motley Fool only cover the basic formula and aren’t helpful when you have multiple components. The article was great in establishing the computation period is right before the first contribution (being removed) was made, which is very helpful if clients make systematic investments monthly and have to remove some, but not all of the contributions. It was also helpful in establishing the AOB. In addition to what I provided above, my client made 2 $ 7,000 contributions on 3/7/2022. One for 2021 and one for 2022. If I read this carefully, the AOB is the period right before the first contribution being removed plus any contributions and transfers/rollovers. This sounds like the $ 7,000 contribution made for 2022 must also be included.- The article covers what to use when the asset isn’t valued regularly. In my case, our clients use ETFs, which change value all day long. For ETFs, does the IRS deem to use the value of the portfolio at the particular time of the day the contribution and removal take place and not necessarily the opening balance or the closing balance? 



Submitted by David Mertz on Sun, 2022-08-21 14:57

I would ask the IRS custodian how they value the ETFs under these circumstances.  The possibilities that seem reasonable to me are market value at the time of the deposit (but that seems an unlikely choice because it involves precise timing although it seems to be what is required by a strict reading of the definition of the computation period), value at the next market close, or the average of the daily high and daily low (the method used by estates for determining date-of-death value).



Submitted by Alan - IRA critic on Sun, 2022-08-21 15:28

In addition, IRA custodians are provided flexibility in determining valuations at certain points. Reg 1.408-11(c)(1) for example indicates that the AOB can be determined using the “most recent, regularly determined FMV of the asset determined as of a date that coincides with or precedes the first day of the computation period”. Therefore, if the custodian’s platform does not capture the real time value of assets in the IRA, the custodian can use the prior day or current day closing account value in determining the AOB. Within those guidelines, market gyrations could work against or in favor of the IRA owner.



Submitted by Robert Roselli on Mon, 2022-08-22 14:18

One uses prior business day close for both the AOB & ACB. The other one uses the prior day for AOB, and for ACB, the use prior day if the request is submitted before the market is opened. If the market is open, they use real-time. I cannot thank you all enough for your valuable guidance.



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