excess contribution

Submitted by Robert Ervolina on Mon, 2015-03-16 19:09

My client made an excess contribution to her Roth in 2013.($5,500). She received a letter from the IRS informing her of the error. The fund company will send her the $5,500 back in order to correct the excess contribution. However, the fund company will not calculate the applicable earnings or losses, since she is correcting the excess contribution after her tax filing deadline of the tax year for which the excess was made.

First, do we need to somehow figure out if there was a gain and if so, what date do we begin and end with?
Second, any chance she can get the 6% penalty waived?
Last, should form 5329 be filed with her most recent return(2014)?
Thank you.



Submitted by Alan - IRA critic on Mon, 2015-03-16 20:34

  • Once the extended due date has passed, the taxpayer incurs a 6% excise tax on the excess amount for 2013 which must be reported on a 2013 Form 5329 with a 1040X. Since the amount was still in the Roth at the end of 2014, she also owes another 6% excise tax on a 2014 5329. When you pay the excise tax, the earnings get to stay in the IRA, so there is no earnings calculation to take place and the 1099R for withdrawing the 5500 will not be coded as a corrective distribution. There is no way to avoid the excise tax, but if she was eligible to make a Roth contribution for 2014 that she did NOT make, she can file a 2014 5329 and apply the 2013 excess to 2014. That would eliminate the 2014 excise tax. If the 5500 is withdrawn this year, it should be tax free, but an 8606 and a final 5329 for 2015 will be needed. There should be no tax or penalty due to 2015.
  • Note that if client already made a 2014 Roth contribution, it could be returned with earnings to create “room” to apply the 2013 excess to 2014. That would eliminate the 2014 excise tax and save some money.
  • The option of applying the 2013 excess should be explored before just removing the 5500. and before filing 2014.

Submitted by Robert Ervolina on Tue, 2015-03-17 16:43

Thank you for your response. Extremely helpful. However, it leads me to a few other quesitons. The client did make a 2014 contribution. So, if I understand you correctly, we can simply have the fund company return the 2014 contribution with earnings, although it isn’t actually an excess contribution for 2014? This is the route she is going to take. Therefore, are there any specific tax forms which would need to be filed with her 2014 tax return? Also, I assume any gain, since she is pre-59 1/2 will be taxed and assessed a 10% penalty. Obviously, on $5,500 this would be small. Thank you again.

Submitted by Alan - IRA critic on Tue, 2015-03-17 17:16

Yes, any earnings on the 2014 contribution returned will be taxable in the year the contribution was made. If it was made IN 2014, the earnings would be subject to tax and penalty on the 2014 return. Obviously, removing this contribution in order to avoid the 6% excise tax for 2014 has a greater benefit if the earnings are small. If the earnings are substantial, this solution may not even save money. You would have to compare tax and penalty on the earnings vs. 6% excise tax on the excess amount to determine the lowest cost. And if the benefit is very small, it is probably not worth doing the return of contribution. However, if she proceeds with the return, the 2014 return would require a 5329 to show the 2013 excess being applied to 2014, and an explanatory statement regarding the return of contribution, dates and amounts because there will be no 1099R for this until next January. Form 8606 is not needed for a return of contribution.

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