Income tax on excess roth ira contributions/earnings

Submitted by Jim Usseglio on Mon, 2024-02-05 11:55

Reposting this as I think my original post did not go through. I have a client that made excess Roth ira contributions for years. We are currently quantifying the 6% excise tax exposure. The client closed the Roth ira account last year which consisted entirely of excess contributions and earnings thereon. As expected, we received the Form 1099-R. It appears based on IRC 408A and 408(d) that the distribution that closed what I will call the “bad” Roth IRA is treated as any other ordinary distribution, meaning if it otherwise meets the definition of a “qualified distribution” the entire amount of the distribution (including the earnings generated from the excess contributions) is tax free, and thus not reportable on Form 8606. This result would seem to be the same if instead, the client only withdrew the excess contributions from the ira, and kept the earnings in the Roth ira, presumably to be withdrawn tax free at some point in the future. Any comments would be appreciated. Thanks, Jim.



Submitted by Alan - IRA critic on Mon, 2024-02-05 16:16

  • The total distribution should be reported on Form 8606, but any earnings will be taxable because the 5 year holding period does not start with any excess contribution. However, client may have made at least one allowed contribution more than 5 years prior to 2023, and if 59.5 the distribution would be qualified.
  • With respect to the excess years, the client will have to file Form 5329 and pay the 6% excise tax on the accumulated excess for each excess year. But client may also consider waiting until the IRS clarifies whether the new 6 year SOL from Sec 313 of Secure 2.0 applies retroactively or not. If it does, then the SOL has expired for years prior to 2017. 


Submitted by Jim Usseglio on Mon, 2024-02-05 17:57

Thanks Alan. What is the authority that an excess contribution to a Roth ira does not start the 5 year tolling? And why report the total distribution on Form 8606 if it is a qualified distribution? Thank you, Jim



Submitted by Alan - IRA critic on Mon, 2024-02-05 18:51

You raise an interesting question. While IRS Reg 1.408A-6, QA 2 clearly indicates that any Roth contribution distributed as a corrective excess contribution is treated as never having been contributed, this exclusion is limited to those contributions that were returned with any gains by the due date of the return. It does include excess contributions that were left in the Roth IRA beyond the due date that incurred the excise tax as was the situation in your post. So it appears that the 5 year holding period would indeed start with such an uncorrected excess Roth contribution not removed by the due date if the 5 year period had not been started earlier. If the taxpayer was also at least 59.5 and completed the 5 year holding period at the time of the distribution, it would be a qualified distribution and income tax free. Qualified distributions do not require Form 8606. Of course, a non taxable qualified distribution is for income tax purposes, and any 6% excise taxes would still be due on Form 5329 for the applicable year. 



Submitted by Jim Usseglio on Mon, 2024-02-05 20:13

Agree. I have to tell you, my head spins when I research these matters deep into the code and regs and case law. The specific guidance is so lacking. Thanks for your help again.



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