excess contributions to ROTH IRA
I have a new client who made a $425 excess contribution to his ROTH in 2009 and made a $2,200 contribution to his ROTH in 2010 that turned out he was ineligible for. I am removing the amounts from his account now with American Funds and am curious as to what will be taxable and subject to penalties. He is under 59 1/2.
Thank you.
Permalink Submitted by Alan Spross on Mon, 2012-04-02 23:48
For both years it is too late to correct this by the usual method.
For 2009, client owes the 6% excise tax on the excess amount and can file a stand alone 5329 to pay that.
Also, for 2010 client owes 6% on the total of the 2009 and 2010 excess amounts on a 2010 5329.
For 2011, if the client qualified for a Roth contribution that he did not make, these excess amounts can be applied to 2011 on a 2011 5329. If not then another 6% tax was incurred as of 12/31/2011 and should go on a 2011 5329 with the tax return or by itself if that return has been filed.
For 2012 the same option applies, ie the excess can be applied to 2012 if eligible. There is no need to remove the excess amounts if they can be applied or if another distribution has been taken. But if none of these options are possible, then the total excess amount should be taken out no later than 12/31/2012. When they are removed it is better not to mention any specific year to the custodian, just ask for a distribution of 2,625. This distribution should be tax free as a return of contributions. but reported on Form 8606. No earnings are involved because the correction is being done late. Finally, a 2012 5329 should be filed to document the distribution and ending the 6% excise taxes. No further excise tax is due if the excess is out by 12/31/2012.
In summary, there should be no income taxes and no early withdrawal penalty. Just the 6% excise taxes for up to 3 different years, and the IRS may bill late interest on the late payment of those excise tax amounts.