Excessive Contribution to Roth IRA
Hi,
While doing my taxes for 2016, I realized that I had contributed an extra of 3000 to my Roth IRA in June 2016. I had the additional amount + earnings withdrawn from the account (last week). Additionally the custodian withheld 20% (as Fed Tax) and a minimum amount (as State Tax). I was also told that since I had the excess removed in 2017, I wont be getting a 1099R until next year. So my question is, how do I report the earnings on my return.
Am I supposed to complete form 8606. If so, how do I report the fed taxes withheld on the earnings?
Thank you very much.
Ron
Permalink Submitted by Alan - IRA critic on Thu, 2017-03-30 04:16
First of all, the custodian should NOT have withheld anything from this distribution as this is a Roth IRA. But they are correct about the 1099R. You will get it next January and it will be coded to apply to 2016. The earnings that were returned with the return of contribution will be taxable on your 2016 return because you made the contribution in 2016. Show the total amount of you received on line 15a and only the earnings on 15b. You also owe a 10% penalty on the earnings amount. Do NOT complete Form 8606. You take credit for the withholding (which never should have happened) on your 2017 return because the distribution was in 2017. So do not forget about the withholding when you file for 2017. Finally, you should include an explanatory statement with your 2016 return explaining the amount of the excess contribution and that you had it returned to you with earnings in 2017. You will NOT have to report any of this on your 2017 return because your explanatory statement for 2016 explains why you reported this distribution on line 15 of your 2016 return.
Permalink Submitted by ron patzky on Thu, 2017-03-30 15:25
thank you for the response. I calculate the 10% on the earnings before (Fed + State) tax was applied.. correct? And should I be using form 5329? thank you
Permalink Submitted by Alan - IRA critic on Thu, 2017-03-30 18:56
Yes, the penalty will apply to the full amount of the earnings before any withholding. This is the amount that will show in Box 2a of the 1099R. You do not need a 5329, as you can enter the penalty directly on the second page of Form 1040 on the line for “additional tax on IRAs” etc.