Excess Contributions to Roth IRA

Submitted by Jeffrey Matts on Tue, 2015-12-22 18:42

I made an excess contribution to a Roth IRA in 2014. I would have recharacterized the excess to a non-deductible Traditional IRA, but I missed the deadline this year. What options do I have now to keep the excess contribution in a tax-advantaged account? I already contributed the maximum amount for 2015 and don’t want to make any withdrawals.



Submitted by Alan - IRA critic on Tue, 2015-12-22 19:02

  • Since you missed the deadline, you will owe a 6% excess contribution excise tax for 2014. You need to file Form 5329 for 2014 to report that excise tax. Sometimes the IRS will accept the 5329 by itself, but to be sure they accept it you should attach it to a 1040X for 2014.
  • You will also owe another 6% if you do not withdraw the excess amount by the end of this year. The withdrawal would be tax free and no earnings calculation is needed, but you would still need to report it on Form 8606 and Form 5329 with your 2015 return. The 5329 will show that you eliminated the excess that you reported on the 2014 5329. Again, no tax or penalty.
  • Another option, especially if you have no gain on your 2015 contribution is to request a return of the 2015 contribution before year end. If there are no earnings, there will be no tax. That will create room to apply your 2014 excess as a 2015 contribution on Form 5329. Then you leave the 2014 contribution in the Roth. Either way you have to withdraw one or the other. If you withdraw the 2015, the earnings calc needs to be done by the custodian and you get back the net result.
  • Here’s another option. You pay the 6% excise tax again for 2015, then do not make a 2016 contribution. That will leave room to apply your excess to 2016 on a 2016 5329. This way you owe another 6% excise tax but you do not have to request any withdrawal from the Roth. You will not need to file an 8606 since there is no withdrawal, but you will have to file a 5329 for all 3 years.
  • So you have choices, but for two of them you need to act immediately to request a distribution. If you want to remove the 2014 excess just ask for a withdrawal of the exact amount. Do not tell the custodian what year it is for. But if you want to withdraw the 2015 contribution you need to specify to the custodian that you want the 2015 contribution returned and they will calculate any earnings and code it as such on the 1099R they will issue next month.

Submitted by Jeffrey Matts on Tue, 2015-12-22 19:52

Thank you very much for your response.  I was hoping there would be a way to do a late recharacterization or conversion.  I’ve heard of conversions to Roths and thought there would be a way to convert the excess from a Roth to a Traditional.  I am surprized that I can withdraw the 2014 contributions tax free, but would have to pay taxes on the 2015 contributions.  Is this because the excise tax of 6% has already been applied to the 2014 contribution?So I either have to withdraw the contributions or leave the contributions in place and reduce future contibutions?  There is no way to keep the tax-advantaged status of the amount in excess contributions?

Submitted by Alan - IRA critic on Tue, 2015-12-22 22:03

  • You can only get the 10/15 extended by the IRS by having a very unique reason for the problem and then you have to pay a considerable fee to file a private letter ruling request with the IRS plus attorney legal fees. This is very costly and time consuming, so I recommend you dismiss that approach right away. That is for people who did a conversion of 200k and then the market tanked. You are only working with a small regular excess contribution.
  • You can withdraw the 2014 contribution tax free because it is a Roth contribution and you did not deduct it. Regular Roth contributions always come out tax and penalty free. But you are paying the 6% excise tax on the excess amount. Earnings stay in (if any). Earnings only come out if you act by the extended due date, and that has passed.
  • Conversely, that due date has not passed for your 2015 contribution. If you want it returned, any earnings have to come out with it. Only the earnings are taxed (not the distribution of the contribution itself) and earnings are also subject to a 10% penalty unless you are 59.5. You do not have to complete this by the end of the year to be able to apply the 2014 excess to 2015. That will eliminate any excise tax for 2015.
  • As you indicated, you lose one year of Roth contributions no matter which solution you choose. You either have to pull out the 2014 contribution and keep the 2015, OR remove the 2015 and then apply the 2014 excess to CY 2015 on Form 5329. Just the mechanics and the tax reporting differs somewhat according to which route you select. And one approach may cost you somewhat less than another. Some people do not care about the small cost differences and choose to select the option with the simpler tax filing requirements. The simplest tax filing would be to just get your excess 2014 out by year end. That holds the excise tax to 2014 only, and there are no earnings to deal with, and your 2015 contribution is left alone. But you have a time deadline and would have to request that distribution immediately.
  • Just curious – you have a 2014 excess. Are you sure your 2015 is not ALSO not an excess contribution?

 

Submitted by Jeffrey Matts on Tue, 2015-12-22 22:46

Thank you very much for all the helpful information!  If earnings stay in what prevents someone from putting in a million dollars, pulling it out the next year and keeping all the earnings in the account?2014 was an unusual year.  I don’t anticipate having an excess contribution for 2015.  Would your advice be different if I were expecting excess contributions in 2015 also?

Submitted by Alan - IRA critic on Wed, 2015-12-23 00:35

  • An IRA custodian would not accept a regular contribution obviously far in excess of the limit. However, let’s say someone in error made 2 max contributions of 5500 to a Roth IRA. If they pay the 6% excise tax for each year, they can keep the excess in as long as they want and the earnings as well. If they eventually want to end the excise taxes, all they have to withdraw is the contribution. The earnings stay.
  • If your income was too high (or if you had no earned income) and made a 2015 excess contribution, the second option would not work because you could not apply a 2014 excess to 2015 when you were not eligible for a 2015 contribution. You would then have 2 excess contributions to remove or pay excise 6% excise taxes for both and eventually apply the excess to two future years where you were eligible. To apply an excess to a future year two conditions must exist – 1) You are eligible for a contribution and 2) You did not already make that contribution. If you remove your 2015 contribution with earnings you have eliminated the 2015 contribution already made which creates room to apply the 2014 contribution to 2015.
  • If you want to see how this works, review a Form 5329 Part IV, which is the form used to calculate the 6% excise tax and to apply excess amounts from prior years. Note that ordinary distribution you take also reduce excess amounts after the extended due date, but I don’t think you have taken any distributions.

Submitted by Jeffrey Matts on Wed, 2015-12-23 23:21

If my income is too high in 2015 can I recharacterize the 2015 excess as a non-deductible Traditional IRA? And still apply the 2014 exess to my 2016 contribution?

Submitted by Alan - IRA critic on Wed, 2015-12-23 23:43

Yes. Your 2014 excess cannot be applied to 2015 because your are using your 2015 IRA contribution space for a TIRA contribution. You would therefore owe the 6% excise tax for 2015 as well as 2014. Form 5329 carries the excess forward each year, and therefore if you qualify for a 2016 Roth contribution that you do not otherwise make, the 5329 will apply your 2014 excess to 2016. The 6% excise taxes end with the 2015 year.

Submitted by Jeffrey Matts on Wed, 2016-03-16 22:23

I was not eligible for a Roth in 2015 so I recharacterized my 2015 contribution to a Non-deductible Traditional IRA. Do I keep paying the excise tax every year until I’m eligible for a Roth? Should I withdraw the excess? I don’t know if I’ll be eligible next year.

Submitted by Alan - IRA critic on Wed, 2016-03-16 23:42

  • If you recharacterized to a non deductible TIRA, there is no excise tax since you are eligible for a non deductible TIRA contribution unless you are 70.5 or do not have earned income equal to your contribution. If you do not have any other non Roth IRA funds, you can convert the recharacterized contribution back to a Roth IRA without tax due. This procedure has been dubbed the “back door Roth” contribution. Note that you must file Form 8606 with your 2015 return to report the non deductible contribution (show the original contribution amount on the form regardless of what it was worth when the recharacterization was processed.)
  • If you DO have other non Roth IRA money your conversion would be taxable. But you could eliminate the tax by rolling the pre tax amount of those IRAs into your current employer plan if it will accept IRA rollovers.
  • If none of the above will work for you, you can still request a return of your 2015 contribution. You would get back an earnings adjusted amount, and if earnings are positive you will have to report them on your 2015 return as taxable income on line 15b.

Submitted by Jeffrey Matts on Mon, 2016-03-21 20:52

The excise tax I was referring to was for the excess contribution made in 2014. I was going to recharacterize the portion of the 2015 contribution equal to the 2014 excess, but as it turned out 100% of the contribution is not eligible for a Roth because of income limits. So there was no room left to move my 2014 excess into 2015. What options do I have for the 2014 excess?

Submitted by Cathryn Salony on Wed, 2016-03-23 21:18

I have a excess roth contribution for 2012, 2013, 2014 and 2015. I have filed amended returns with 5329 for 2012,2013 and 2014. For 2015 I transferred the all the roth contributions including the earnings to a traditional ira on 01/01/2016 effective for 2015.  My question is do I need to file a 5329 for 2015. And also, do i need to report a recharacterization in 2015 or file 8606.  Any advice would be appreciated.  2015 Tax return is not filed.

Submitted by Alan - IRA critic on Wed, 2016-03-23 22:18

For your 2015 return, you need to need to file an 8606 to report a non deductible TIRA contribution for 2015 unless it is deductible. Also, an explanatory statement explaining the recharacterization of the 2015 contribution as a TIRA contribution. But you still have not removed the 3 prior years of excess contributions so you will owe a 6% excise tax on the total of those 3 years of excess contributions on a 5329 with your 2015 return. Finally, you need to remove those excess contributions by distributing the total amount of them (no earnings calc just a normal distribution) before year end 2016 to eliminate and excise taxes for 2016 as well. You would report that distribution on a Form 8606 for 2016 and a 5329 for 2016 showing distribution of the total excess contributions you carried into 2016. In other words, you have eliminated your 2015 excess contribution, but the other 3 are still in the account and must be removed.

Submitted by Cathryn Salony on Wed, 2016-03-23 23:00

Thank you for your response.  Just to clarify, even though they moved all the contributions ( no excess contributions in Roth) out in Jan 16 to a Traditional IRA it only applies to the 2015 excess contribution for 2015. Then in 2016 they issue a 1099 as a normal distribution and that will take care of the account. Can’t they make the entire recharacterization for all the years effective for 2015 and issue a 1099 for the distribution leaving no penalty. sorry for the double post

Submitted by Alan - IRA critic on Wed, 2016-03-23 23:20

No. The recharacterization deadline for an excess contribution for any year is 10/15 of the following year. Therefore, a recharacterization done anytime in 2015 can only be done for a 2014 or 2015 contribution, not for any of the earlier contributions.  What is the amount on your 1099R received in January? It should be limited to the amount of your 2014 contribution adjusted for earnings. You might also have simply taken a distribution of the earlier years but that would be reported on a different 1099R and of course a distribution is totally different than a recharacterization.

Submitted by Cathryn Salony on Thu, 2016-03-24 04:27

Thank you so much.  It all makes perfect sense now!

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