Earnings on excess RothIRA contributions

Submitted by Daniil Magdalin on Thu, 2017-05-18 04:35

I contributed too much to my RothIRA in 2014. I realized this in 2015 but withdrew the original contribution amount, not including the earnings. I then didn’t report the distribution because I foolishly assumed that it was a correction and didn’t need to be reported. Now the IRS wants to charge taxes on the distribution.

I know how to report that this distribution was to correct an excess, but what do I do about the earnings?

Can I treat the earnings as an excess contribution for 2014 and pay the 6% penalty for 2014, 2015, and 2016?

Do I have to also calculate any earnings on the earnings from when I withdrew the original amount till now?

Thanks,
Daniil



Submitted by David Mertz on Thu, 2017-05-18 13:26

  • Earnings in your Roth IRA attributable to excess contributions are not themselves considered to be excess contributions.
  • It seems to me that the most straightforward solution would be to amend your 2014 tax return report the excess contribution on 2014 Form 5329 Part IV and pay the 6% excess contribution penalty for 2014, then treat the distribution in 2015 as a return of excess contribution after the due date of your 2014 tax return by reporting the regular distribution (code J, T or Q in box 7 of the Form 1099-R) on an amended 2015 tax return.  If the distribution is not a qualified distribution, despite being an excess contribution the excess contribution added to your contribution basis in your Roth IRAs which will be applied against the 2015 distribution on 2015 Form 8606 Part III line 22 to make the distribution tax and penalty free.  The distribution will also appear on 2015 Form 5329 Part IV line 20 to reduce your excess (presumably to zero).  With no excess carried onto 2016, there is nothing that needs to change with regard to this on your 2016 tax return.

Submitted by Daniil Magdalin on Thu, 2017-05-18 14:47

That makes a lot more sense than what I was thinking. Thanks for your help,Daniil

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