Correcting Excess Contributions 2014 & 2015

Submitted by Susan Lee on Sun, 2017-04-02 05:00

Hi,

I am so thrilled to have found your website! It is very educational and a great learning tool! I have learned a lot reading your forums, hoping you can provide some further guidance on correcting excess contributions:

2013 return:
Was eligible and did contribute $5,500 to Roth IRA

2014 return:
Due to income limits, ineligible to contribute to Roth IRA
Erroneously contributed $5,500 directly into Roth IRA (excess contribution)

2015 return:
Same as above, ineligible to contribute to Roth IRA
Erroneously contributed $5,500 directly into Roth IRA (excess contribution)

2016 return & future:
Will not be eligible to contribute to Roth IRA
Will do back door Roth (hopefully correctly this time!)

Action Plan:
•Will file 2014 Form 1040-X with 5329 to pay 6% excise tax on the 2014 excess contribution ($5500 x 6% = $330)
•Will file 2015 Form 1040-X with 5329 to pay 6% excise tax on the 2014 & 2015 excess contributions ($11,000 x 6% = $660)
•Prior to 4/18/2017, will withdraw the $11,000 excess contribution, which will be tax-free since it is regular distribution from Roth IRA. Note: Am not yet 59 1/2

Questions:

1.Earnings from the $11k excess contribution – Please confirm if the earnings may remain in the Roth IRA, even though I am no longer eligible for Roth? Where can I find the IRS guidance/publication that permits this? Seems too good to be true!

2. Will anything be subject to 10% early withdrawal? Seems to be no?

3. When amending 2014 and 2015, can Form 8606 be omitted since it is no longer relevant?

4.Can you provide detailed guidance on preparing the 2016 return (not yet filed):

◦Form 5329 Part IV – Line 20 will report the $11k distribution, and Line 23 will report $0 excess contributions for 2016 (and no more 6% excise tax!)

◦Form 8606 Part III, Line 19 – will report the $11k nonqualified distribution? Is the $11k distribution considered a 2016 or 2017 reportable event?

◦1099-R will not have been received by 4/18/17, do I act as if I have, and input 1099-R info in 2016 return:
◾Line 1 gross distribution = $11k,
◾Line 2 taxable amount = $0,
◾Code = J? or T?

Thank you SO much, very much appreciated!



Submitted by David Mertz on Sun, 2017-04-02 21:01

  1. Earnings are permitted to remain in the account.  This is inferred from the lack of anything in the tax code that results in the earnings as being treated as an excess contribution (I think I’ve even seen this mentioned in a PLR) and the details of Form 8606 indicating that a regular distribution from the Roth IRA reduces the previously reported excess contribution dollar for dollar.
  2. Correct.  The excess Roth IRA contribution increases your contribution basis and a regular distribution of less than your contribution basis is tax and penalty free.
  3. There is no need (and, as far as I can tell, no prior need) for 2014 and 2015 Forms 8606.  You will only need a 2016 Form 8606 if you make the nondeductible traditional IRA contribution for 2016.
  4. You’ll still have a penalty of 6% of $11,000 for 2016 because the regular distribution from the Roth IRA was not made by the end of 2016.  The 2016 Form 5329 will look just like your 2015 Form 5329.  There is nothing to report on 2016 Form 8606 Part III because you did not make a Roth IRA distribution in 2016.  The regular distribution from the Roth IRA will appear on Part III of your 2017 Form 8606.  The 2017 Form 1099-R that you will report on your 2017 tax return will have $11,000 in box 1, a blank box 2a, box 2b Taxable amount not determined marked, and code J in box 7.

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