Excess Roth Contributions
A new client recently told me that he mistakenly contributed $5,000 per year for years 2006 thru 2009 to a Roth IRA. His MAGI exceeded the permissible limits for funding his Roth. My question is how do I handle the 6% excise tax for those past years? Can I prepare one form 5329 for 2011 and compute the excise tax for all those past years? He recently had all his Roth contributions for those years removed from his Roth IRA.
Thank you
Permalink Submitted by Alan Spross on Thu, 2011-05-12 20:59
He should download the 5329 for each year and start with the oldest. These forms are cumulative and result in reduction of the penalty if he took out any distributions during this period, or while it does not sound likely if he qualified for any year prior to 2011 and did not contribute the form will apply some of the excess to that year. Another possibility is that the year end value of his Roth IRA (all of them) might have dropped below the contributed amounts and then the 6% penalty would be applied to the lower year end value. All of the forms can be send together to the IRS with the check for the 6% penalty, and the IRS will likely bill late interest on these payments as well. Too bad the IRS does not notify taxpayers promptly, but better to have corrected this because their is no statute of limitations for excess contributions.
For this year he will report the distribution of the 20,000 on Form 8606. This should be tax free since it is a return of regular contributions. He will also need a final 5329 for 2011 to document that the prior excess amounts have been distributed.
Assuming no special adjustments in the 5329 forms, the damage is:
For 2006 – 6% of 5,000
2007- 6% of 10,000
2008 – 6% of 15,000
2009 – 6% of 20,000
2010 – 6% of 20,000
2011 – -0- plus IRS interest on the 4,200, so payment ASAP will stop the interest clock. Only good news is that any earnings get to stay in the Roth IRA.