excess contribution to Roth on previous Roth IRA and existin
a client has excess contribution on their previous Roth IRA and they transfered the balance to their new Roth IRA without removing the excess. How do they remove the excess from previous acct through the new Roth IRA plus the earning . apparently they have excess plus earnings with the previous Roth IRA and the current Roth IRA . How is the calculation done on both acct?
Permalink Submitted by Alan Spross on Thu, 2011-03-10 23:28
Since there is no longer a previous account, the corrective distribution must come from the current Roth IRA. I am also assuming that the excess contribution in the old account was for 2010 or 2011 so it can still be corrected prior to the extended due date. If the excess was for a 2009 or earlier contribution, then client just withdraws the amount of the excess without any earnings calculation.
If excess was for 2010 or 2011, the client will just inform the new Roth custodian the year of the excess contribution being corrected and the amount of it. The custodian will make an earnings calculation using the current Roth assuming that the excess contribution was made to the new Roth on the date of the incoming transfer. They will then return that amount and report it on a 1099R. At least that is what they should do. The IRS should accept that calculation.
There is also a special rule where if both the old and new accounts hold ONLY the contribution that was excess and the entire amount of the contribution was excess, they just return the entire balance of the new account. This is easier but does not cover most of these situations.
Permalink Submitted by Clark Randall on Wed, 2016-03-23 09:27
This client’s previous Roth custodian issued a 1099R as a result of “Failing the ADP or ACP test After a Total Distribution” and reported excess contributution with earnings to the date that the Roth was transferred to a new custodian even though no corrective distribution was actually made. The new custodian issued a check for that amount the old custodian calculated further adusted for the losses incurred while the Roth was at the new custodian. They also will issue a 1099R next year reporting this distribution. My concern is it will appear to the IRS that TWO excess distributions were made, when there was only one. This first custodian will not change as they say it was encumbant upon then to report the overage.
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-23 17:14
Client apparently has a 2015 1099R with 0 in Box 2a? What is code in Box 7? If the plan balance was transferred to a new designated Roth plan for a new employer, a later corrective distribution with a calculated loss from the plan will not be taxable because the Roth contributions were post tax and the earnings were negative.