Reducing excess amount contributed to Roth IRA

Submitted by Paula Calhoun on Mon, 2023-02-06 15:41

My husband and I both have Roth 401(k)s through our employers. However, because my employer does not match contributions, I set up a Roth IRA years ago and began contributing $300 per month, $3,600 per year. I thought that was fine, since it is well below the $6,000 allowed. I just learned about the MAGI limits. I have been overcontributing since 2019, and I’ve got to fix this. I have been reading past discussions on this topic, and I think I mostly understand how to take care of it, starting with recharacterizing the $3,600 plus earnings for 2022 and the $300 plus earnings that I contributed in January 2023. But the 6% penalty for the prior years is going to cost me. In 2020 and 2021, our MAGI was too high for me to make any contribution. However, in 2019, I could make a partial contribution. According to the worksheet in the 2019 IRS Publication 590-A, my reduced contribution was $1,190, which means my excess for that year was $2,410. Does that mean my husband also could have contributed $1,190 to a Roth IRA? Since he didn’t, can I reduce my excess of $2,410 by $1,190, making my excess for that year $1,220 instead of $2,410? Or is this just wishful thinking? I am getting this from a statement Alan made in an old post that says, “Note that if any distributions were taken or any years in which the spouse was eligible for a Roth contribution but did not make one will reduce the cumulative excess amount and therefore the 6% tax.” I know we are not taking about a huge difference, but this cumulative 6% is really starting to add up!

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Permalink Submitted by Alan - IRA critic on Mon, 2023-02-06 16:19

The statement is correct with respect to distributions reducing the excess, but since all IRAs are individual you cannot reduce your 2019 excess because your husband did not make a contribution. Further, no distributions have been taken by either of you. The excess contribution 6% charges are reported separately on a 5329 for each spouse, so you still had a 2410 excess for 2019 subject to the 6% excise tax.
Start with a 2019 5329 for you, and the excess amount will carry over to your 2020 5329, etc so the cumulative amount subject to 6% grows each year. You are correct that the 2022 and 2023 excesses can be corrected by either a recharacterization or removal of these contributions, but you will still owe the 6% on the total of your 2019-2021 excess amounts in 2019-2022 5329 forms for each of you.
You have to take a regular early distribution of the remaining excess before the end of 2023 to avoid another penalty for 2023. Just request the dollar amount of the distribution from the custodian, no need to mention that this amount was a prior year excess. Since no earnings are calculated on the 2019-2021 excess amounts, any earnings remain in the Roth and the distribution should be tax free since it is a return of your regular Roth contribution basis. This will be reported on your 2023 8606. The corrective distributions or recharacterization of 2022 and 2023 excess amounts are not reported on Form 8606.
The above applies separately to your husband, but his excess amounts will be different.
The IRS may or may not charge late interest on the late paid excess taxes. If so, they will bill you.
It’s unfortunate that the IRS will not alert you to excess contributions promptly to avoid multiple years of excise taxes. They have all the info to do so, but they never have. There has been do statute of limitations in the past for excess contributions, but there will be in the future based on your 1040 filing. However, it does not appear that this SOL will apply to years prior to 2023.