Roth IRA Contributions and Phaseout Rules

Submitted by Kevin Zoltek on Fri, 2013-01-04 14:31

I have been contributing to a Roth IRA for 2010, 2011 and 2012. My income is high enough to where I was not suppose to have performed these contributions. What can I do or what are my options here?



Submitted by Alan - IRA critic on Fri, 2013-01-04 17:32

I’ll assume your modified AGI was not only too high for a partial contribution, but too high for ANY Roth contribution. Too bad you did not notice this about 3 months ago, as you could have withdrawn your 2011 contribution or recharacterized it and also would have avoided another year of excise taxes, since these taxes accrue on 12/31. What you would need to do now is:

  • 1) If you took any distributions please advise since that would change things. It’s too late to do anything about your 2010 and 2011 contributions. You would need to send in a 5329 for 2010 and pay the 6% excise tax on your 2010 contribution. Also a 5329 for 2011, paying the 6% excise tax on the total of your 2010 and 2011 contributions and a 2013 5329 with your 2012 return to report the 6% tax again on your 2010 and 2011 excess.
  • 2) For 2012, you can still request a return of the excess contribution for 2012 with allocated earnings. The earnings will be taxable on your 2012 return and subject to 10% penalty if you are under 59.5. You won’t get the 1099R for this until 2014, but you need to get the earnings amount and include it on your 2012 return.
  • If your income will drop in 2013, you can apply the 2010 excess as your 2013 Roth contribution and not withdraw it. But if your income will be too high again, you need to withdraw the total of your 2010 and 2011 contributions before the end of 2013. You are paying the 6% excise tax on them, but since there is no additional tax until the end of 2013, you might as well not withdraw those contributions until December. Let them continue to generate tax free earnings since the earnings for those two years can stay in the Roth. Just don’t forget to request the distribution of the total (don’t mention excess contributions to the custodian, just ask for a regular distribution) before year end. If you think you might forget, do it now. This distribution will be reported on your 2013 8606 and will be tax free. You will also need a 2013 5329 to show that you have eliminated all your excess contributions. No 6% penalty for 2013.
  • The IRS has probably not even contacted you yet about this, but since there is NO statute of limitations for excess contributions, best to take care of it this year.

Submitted by [email protected] on Tue, 2013-01-08 13:34

I converted traditional IRA monies in a year that my income(your assumption is correct) was too high to a Roth IRA.  What options do I have with those monies?

Submitted by Alan - IRA critic on Tue, 2013-01-08 16:52

If you did a Roth conversion, there are no income limits after 12/31/2009. Regular Roth contributions continue to have max income limits, but the 100,000 modified AGI limit for conversions ended after 2009. In your initial post were you referring to regular contributions or conversions?

Submitted by [email protected] on Wed, 2013-01-09 20:26

my initial post was asking about contributions only.  the second post was asking about the conversion.

Submitted by [email protected] on Thu, 2013-01-10 14:01

Do I pay the excise tax on allocated gains?  if so, who calculates this?  The custodian or my accountant?  Also, since I am paying the 6% excise tax, do I have to roll the monies out of the Roth IRA?  If so, what are my options?  Can I roll those monies to an after tax traditional IRA?

Submitted by Alan - IRA critic on Thu, 2013-01-10 16:46

  • For the 2010 and 2011 excess contributions, the 6% excise taxes only apply to the actual excess contributions, not to gains, so you can easily calculate that yourself for purposes of payment with Form 5329. You must correct the excess, but some of the excess can be applied to your 2013 Roth contribution if you will be eligible for a regular Roth contribution in 2013 due to lower income. Otherwise, you must ask for a distribution of the excess amount for 2010 and 2011 before the end of the 2013. No earnings calculations apply and the earnings stay in the Roth.
  • For 2012 excess, you can either remove it WITH calculated earnings prior to 10/15/2013 OR you can recharacterize the contribution with earnings to a TIRA before that same date. This must be done by direct transfer. The TIRA contribution cannot be deducted if you were covered by a retirement plan at work in 2012. If the recharacterized 2012 contribution is not deductible, you would report that on Form 8606 for 2012.

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