Excess Roth Contribution, But already Contributed for Current Year

Submitted by Delete User on Thu, 2017-10-12 02:37

Hello.

Here’s a general timeline of what happen.

Year 2016:
$500 contribution to IRA (2016 tax year)

Year 2017:
$5500 contribution to ROTH (2016 tax year)
$5500 contribution to IRA (2017 tax year)

October 11, 2017
Realize I’ve over contributed by $500 to my Roth IRA (since I did IRA, and Roth, they would look at Roth first, I believe). This is 4 days before the October 15th, and I will be able to withdraw $500 excess contribution & Earning from my Roth & get the necessary paperwork to amend my tax return before the deadline.

So, I guess I got 2 options for me?

1) I can try to withdraw $500 plus Earning from my 2017 tax year’s IRA contribution and fill 5329 (excess contribution for 2016) and pay the $30. I guess I need to figure out what my 1040 paper needs to be like since I withdraw money & earning from my 2017 IRA plan…But that leaves only 1 penalty to pay for.

2) Leave the money as is. Pay $30 in fee for 2017 tax year (5329 form), and make only $5000 contribution to IRA for 2018 tax year. So, in 2019, I can make regular contribution ($5500), but I will need to pay another final $500 x .06% = $30 late penalty since I never corrected my contribution in 2017. That leaves me with 2 excess late penalty. But is easiest to do?

Does that look correct?

Thanks!



Submitted by Alan - IRA critic on Thu, 2017-10-12 04:12

  • You might first see if your custodian can process a return of contribution by close of business on 10/16. If so, if you have the 500 returned from the Roth, any earnings will be taxable in 2017, so you would not need to amend your 2016 return unless you did not report the TIRA contribution. If your custodian cannot get this done (would probably require a phone order) you could just pay the $30 excise tax on Form 5329 and send in the 5329 stand alone. You would then have to request a return of 500 from your 2017 TIRA contribution so you could apply 500 of your Roth excess from 2016 to a 2017 Roth on a 2017 Form 5329. Of course, I do not know if you will qualify for a Roth contribution for 2017 (MAGI limit).
  • Note that the 10/16 deadline applies to processing the returned contribution. You can amend the 1040 much later if need be.
  • It is also not clear if you can deduct the TIRA contributions for both years. 
  • Note that only contributions you made IN 2017 can be returned without any earnings being taxable for 2016. That is why I did not recommend having your 2016 TIRA contribution returned as I assumed you did not want to amend your 2016 return.
  • Your Option 2 would also leave you with another $30 excise tax for 2017 since you could not apply the excess until 2018.
  • In your shoes most people would elect the easier choice filing wise since the dollar consequences are small. But if you want to apply an excess amount to a later year, your income in the later year may not allow you to apply a Roth contribution, or you may not be able to deduct a TIRA contribution. 

Submitted by Delete User on Thu, 2017-10-12 05:26

Thank you for taking your time to answer my questions and help! 

  • My $500 contribution to TIRA was never deducted (Cap1) since I didn’t get my 5498 until after tax return (and forgot), and my new roth contribution ($5500) in 2016 was with Fidelity. 
  • So, I dont know about returning the $500 in Roth since it’s almost a year and have earn something. And since I never reported my tIRA contribution in early 2016, I’m not too sure myself of the option. Plus, this is more paperwork method, and more time constraint. 
  • I’m well within TIRA & Roth limit (with my MAGI calculation since I max out 401k contribution to reduce it). Salary is 65-70k now, and I’ll expect to be still within Roth & probably still able to deduct TIRA contribution in 2-3 years.
  • And yes, at this point, the easier method is less paperwork with #2 option. Since it’s just $30 per year for 2 years, I believe I can put in $5000 contribution to my TIRA 2018 contribution, and pay $30 (via 5329) for 2016, and 2017. 
  • So, my last question is this if I choose that method. Do I need fill the 5329, and pay $30 for 2016 now (before October 16th) , or can it be done when I fill for my 2017 tax year? If I fill it in April 2018 for 2017 tax year, I would need to pay 1 final payment for 2018 tax year when I start to fill for my 2018 tax (in April 2019). Correct? Since I have my contribution max already in 2017.  And I believe even with that, I can still do $5500 deduction for 2017 for tIRA, and do $5500 for 2018 (tax year). I’m a huge fan of tIRA, and I only did Roth once since I wasn’t aware that I could deduct tIRA contribution before I get my 5498.

Thanks!Sam

Submitted by Delete User on Tue, 2017-10-17 02:52

What title say!

Submitted by Alan - IRA critic on Tue, 2017-10-17 03:43

  • You did not have to file the 5329 for 2016 by today. But you should file it before year end so it can be processed before you file your 2017 5329 with your 2017 return. Your 2017 5329 starts with entering your excess contribution balance carried over from 2016. Because the 2016 excess was not removed by today, you no longer have a choice regarding which type of contribution was an excess contribution for 2016. The $500 excess is deemed to be a Roth contribution, so you have to fill out the Roth portion of Form 5329 for 2016. You should also check to make sure you either took a deduction for the $500 TIRA contribution for 2016 or file Form 8606 to report that $500 as non deductible. You can send in the 8606 by itself without a 1040X.
  • In 2018, since the excess is for a Roth, you should contribute $5000 instead of $5500 to your T IRA. That will resolve your excess amount. You will still need a 2018 5329 but there will be no excise tax for 2018 since the excess will have been applied to 2018 as a Roth contribution. If you do this you can still deduct your 2017 TIRA contribution.
  • Following the above approach, you do not have to withdraw anything. You just contribute 500 less for 2018.
  • NOTE: You do not have to wait for the 5498 to report a TIRA contribution as deductible or non deductible on Form 8606. If you do NOT already have a basis in your TIRA from non deductible contributions, you probably do not want to start with 2016, so that would require you to amend your 2016 to claim the $500 deduction and that will eliminate the 2016 8606. 

Submitted by David Mertz on Tue, 2017-10-17 16:42

There is no reason to allow the excess Roth contribution to carry into 2018 (to be applied as a Roth IRA contribution for 2018), incurring a $30 penalty on this excess for 2017.  Instead, now that it is past the extended due date of your 2016 tax return, simply make a simple regular $500 distribution from the Roth IRA near the end of 2017 and in 2018 make a full $5,500 IRA contribution for 2018.  This also avoids the consequences of another $30 penalty for 2018 in the case where your 2018 modified AGI prohibits a Roth IRA contribution.  Your 2017 Form 8606 Part III will show this as a nontaxable distribution of contribution basis and your 2017 Form 5329 Part IV line 20 will show $500, eliminating the excess for 2017.

Submitted by Delete User on Wed, 2017-10-18 03:34

  • Got it. I will fill my 5329 for 2016 before year’s end reporting that my Roth IRA of $500 excess contribution. I don’t necessary need to report my $500 TIRA contribution as deductible, right? If I don’t, I’ll probably be double tax later if I don’t, so maybe that is the best that I do. I’ll submit them separately/together if I decided I needed that $500 nonductiaable. 
  • For 2018 contribution, I will contribute only $5000 to my TIRA. As you mention, that should resolved my excess amount. I will need to pay the $30 penaty when I submit my 1040 alongside my 5329 for excess contribution for 2017 tax year (for the 2016 excess). Again, I will pay the $30 penaty again for 2018 tax year since that’s when I finished my excess contribution. So, my next 2 tax year (2017, 2018) will include a 5329 for excess contribution!
  • I have never used a 8606 in the past to report my TIRA contribution (as it was only this year that I’m aware of it). So for incoming 2017 tax year (in april 2018), I could still deductive the full $5500 for the contribution that I have made. I can claim deductible without waiting for my 5498 as long as I’m aware that I qualify for the full deduction, correct?  —- Correction, I though the 8606 was used for TIRA deduction, but that form appears to be only for nondeduction so I don’t need to fill 8606 if I’m doing only deductiable TIRA.
  • Thanks for the comment Dmx, but I think that’s a bit complex for my situation (I’m just starting to understand the tax law, and the one that Alan-IraCritic) seem to be most sensible for me to follow.
  • Is there any mistake in my assumption on what I need to do? basically 1) fill 5329 before this year end for 2016 excess tax (but don’t pay, right?), 1A) Optionally fill 8606 for the $500 deduction in 2016 if needed. 2) Contribute $5000 to IRA in 2018 tax year, and pay penalty for 2017 tax year, and 2018 tax year. And 3) In 2017 tax year, I could still deduct the full $5500 amount for TIRA with 1040 without 5498 if I am correct. And 4) after my final penalty in 2019 (for 2018 tax year), I would be back to normal. Anything wrong with it? Thanks for reading my rambling, guys!

Submitted by David Mertz on Wed, 2017-10-18 15:56

  • If you resolve the excess for 2018 by newly contributing only $5,000 for 2018, you’ll have no penalty for 2018.  Your 2018 Form 5329 will show zero penalty because the $500 excess would be absorbed as a 2018 contribution (provided that your modified AGI permits you to make a Roth IRA contribution for 2018).
  • Taking a $500 regular Roth IRA distribution before the end of 2017 and reporting it on a 2017 Form 8606 will eliminate the need to file a 2018 Form 5329, so it’s really no more complex that what you are already planning.  It saves you $30 in penalties for no additional effort beyond requesting and receiving the $500 regular distribution from the Roth IRA.  You’ll simply use that $500 to fund the full IRA contribution for 2018.  In my own similar situation, I was able to request that such a regular distribution be paid directly to my non-retirement account at the same financial institution, so I didn’t even have to handle a check.

Submitted by Delete User on Sat, 2017-10-21 04:14

  • Let me see if that make sense to you (from what I understand).
  • Since my 2017 contribution is already max out (I’d pay very early back in march 2017), I can still deduct $5500 via 1040 on my 2017 tax year (coming up soon!), correct? And I’ll be paying for the $30 in penalty for 2017 tax year (filling my 2016 5329 before year’s end to report it but not pay the $30 yet). But starting next year (2018), I can only contribute $5000 to my tIRA so my 2018 tax year will soak the excess. I can deduct $5000 for my 2018 tax year as I imagine I’m still under 63k MAGI calculation. I do not have to pay $30 penalty the 2nd time (for 2018 tax year) . If that is the case , it seems a bit odd that I’m paying only 1 penalty for having excess contribution in 2016, and 2017 if that’s what you meant on the 1st bullet point, DMx.
  • Or what you meant by the 1st bullet point only work if I take your 2nd bullet point into consideration? which is to take my $500 roth contribution ($500 in tIRA in 2016, and $5500 in Roth in 2016 & I have already max out my tIRA in 2017 tax year) before the end of 2017 (tax year, or this current year?) , and report it on 2017’s 8606 (part 3, for nonqualified distributions that would be in 2017’s tax year?). I think one that might trip it up is that I’ve already max out my tIRA contribution for 2017 so I dont have any roth IRA contribution in 2017 tax year to take it out on (if I understand correctly)
  • If that was the case and it would work, I could basically do this 1) file 2016 5329 now before end of 2017 without paying? 2) take $500 from any of my Roth contribution (most likely from 2016’s roth contrbution) before the end of 2017 (this year). 3) In april 2018 when I fill my 2017 tax, I need to pay $30 in penalty (5329), file my $5500 in tIRA deduction (full, or only 5000?), and file the 2017 form 8606 saying that I took $500 in unqualified distrbution. And 4) Only contribute $5000 to my TIRA for 2018 tax year. After that, I’m back to regular taxes without 5329! Anything else looks wrong/right? 
  • Thanks for all your input guys, I really appreciate this!

Submitted by David Mertz on Sat, 2017-10-21 15:38

  • You can still deduct your traditional IRA contribution for 2017.
  • If you choose to carry the excess into 2018 by doing nothing before the end of 2017 to resolve the $500 excess presently in the Roth IRA, you have the original $30 penalty for 2016 (reported on your 2016 Form 5329) and *another* $30 penalty for 2017 (reported on your 2017 Form 5329).
  • If you instead make a *regular* $500 distribution (*not* a return of contribution) from the Roth IRA before the end of 2017, the calculations on your 2017 Form 5329 will result in the penalty for 2017 disappearing and no excess carried into 2018.  With no excess carried into 2018, you can make a full contribution for 2018.  Review the details of Form 5329 to see the calculation.
  • No matter what you do, you must pay the $30 penalty for 2016 with your 2016 Form 5329 if you have not already done so.  Making a regular distribution of $500 from the Roth IRA before the end of 2017 only allows you to avoid *another* $30 penalty for 2017 (as well as avoiding carrying the excess into 2018).

Submitted by Delete User on Sun, 2017-10-22 23:55

  • Of course, I would prefer the 2nd option by not having to pay twice!
  • For right now, I have done nothing but as far as I know, its past the October 15th deadline as well. But you mention I can still do something until the end of 2017 such as make a regular distrbution of $500 from my Roth IRA to my taxable/brokage account. I got Fidelity IRA, so I’ll just ask them for that. I imagine this is 2017 distribution from Roth IRA, and I’ll need to file my 2017 8606 to account for that later. 
  • In regards to the $30 penalty for 2016, I need to submit my 2016 5329 but do I pay that $30 penalty on it right now before the end of 2017 as well?  And that can be submitted by itself (no 1040x, etc, right?). 
  • I got a link picture of what my expected 2016 5329, 2017 5329, and my 2017 8606 looks like. It looks good? If it does, I’ll submit it that way!
  • https://imgur.com/a/rQUtZ

Thanks for all the help!

Submitted by David Mertz on Mon, 2017-10-23 02:04

  • You would typically pay the $30 when you file the 2016 Form 5329.  The IRS still might bill for interest, so the sooner you pay the $30 the less interest the IRS will bill for.  You should be able to submit the 2016 Form 5329 stand-alone, but it probably would not hurt to include Form 1040X as well.  The only change to your originally filed tax return is $30 of Other taxes.
  • Yes, the forms in your link are correct.  Line 22 of the 2017 Form 8606 will show the total amount of regular contributions that you have made to Roth IRAs, including the excess contribution.  If the only contributions that you have made to Roth IRAs are the ones mentioned in your original question, you’ll have $6,000 on line 22, otherwise you’ll have more on line 22.  That will make line 23 be $0 and lines 24 and 25 will be blank.

Submitted by Alan - IRA critic on Mon, 2017-10-23 02:23

  • Yes, if you want to use this option, you are on the right track. Take the $500 Roth distribution very soon, but you can file the 2016 5329 right away (either before or after the actual distribution). Usually, the IRS will accept the 5329 without a 1040X, but every once in awhile they might ask for the 1040X.  If they do, you can file it then. $30 is usually too small for the IRS to bill you late interest on that amount, but again the sooner you pay the less the interest will be in the unlikely event that the IRS does bill late interest.
  • The 2017 5329 should be filed with your 2017 tax return. Your example is correct, but when you file the 2017 edition will be available. Should be no changes to the actual lines from the example you completed.
  • Your final form is actually the 8606, not a 5329. Line 22 should show the total balance of regular Roth IRA contribution in your Roth IRA. That is probably far more than the $500 you are withdrawing, but you need to get that amount correct. The Roth custodian send you a 5498 every year that you make a regular Roth contribution indicating the amount, but it is up to you to keep a record of the accumulated total (less any distributions you have taken from your regular contributions balance. Line 23 will be 0, and therefore you will stop there and skip lines 24 and 25. File the 8606 with your 2017 tax return.

Submitted by David Mertz on Mon, 2017-10-23 02:44

It took me a moment to realize that the form identifications were placed below the form excerpts, not above.

Submitted by Delete User on Mon, 2017-10-23 03:30

  • Thank you for all the help, I’m in the good path than. I’ve only ever made $5500 contribution to Roth, the $500 was in tIRA (well, $500 TIRA than $5500 in roth).  So, newly updated 8606 picture here. I screw up the 1st one, and put 0 in line 22 (couldnt get my subtraction correct…:(  https://imgur.com/a/2FkSv
  • My step
  1. File 2016 5329 and pay $30 in tax standalone online (they allow that, neat) (2016, 2017 5329 pic)
  2. Do a regular distribution of my Roth IRA of $500 before end of 2017 (not return of contribution)
  3. File 2017 5329 and pay no penalty tax
  4. File 2017 8606 and mention my 2017 roth distribution (2017 8606 pic)
  5. And I guess on my 1040, I can deduct my $5500 for tIRA that I made for 2017 tax year and I don’t have to deduct $500 from my 2018 tIRA! Win win!
  • I really appreciate the time and effort that you guys made to this, is there anyway for me to contribute to your site monetary, or etc? 

Submitted by Delete User on Mon, 2017-10-23 03:54

  • For the Roth distribution, do i asked for regular distribution or withdrawal to my taxable account? It looks like withdrawl also apply the 10% penaty tax (not sure where I fill that in since its not in 8606 or It doesnt look like I would pay the tax on that from my curent 8606?)

Submitted by David Mertz on Mon, 2017-10-23 04:28

  • I forgot that the first $500 contributed was to a tIRA, not to a Roth IRA.  That means that 2017 Form 8606 line 22 should have $5,500, not $6,000, but the rest is the same.
  • Because the $500 distribution from the Roth IRA is not taxable (2017 Form 8606 line 23 is zero), it is also not subject to any early-distribution penalty.
  • As far as your tax return is concerned, it doesn’t matter whether you take the distribution in cash or have it deposited into your taxable account.  When I did a nearly identical transaction with Fidelity a few years ago, I simply had the distribution deposited directly into my taxable brokerage account with Fidelity, all done online.  Fidelity’s system provides the option to select your taxable Fidelity account as the destination.

Submitted by Delete User on Mon, 2017-10-23 04:53

  • Fixed it to be $5500 on Line 22.
  • Thanks for the 2nd bullet point info, I saw that I can “withdraw post-tax contributions (also known as “basis”) from your Roth IRA without penalty.”
  • Regarding this point, i see fidelity lets me withdraw money from my roth to my IRA, is that just the regular distribution? I imagine that includes both the contribution + earning (is that what I need?)

Submitted by David Mertz on Mon, 2017-10-23 12:32

  • I’m not sure exactly what Fidelity selection you are looking at that is indicating withdrawing money from your Roth IRA to your traditional IRA, but when making the regular distribution from your Roth IRA you do not want to involve your traditional IRA in any way.  Do not make your traditional IRA the destination of your Roth IRA distribution.
  • If Fidelity is asking you to indicate the type of distribution, since you are apparently under age 59½, this regular distribution from your Roth IRA will be an early distribution (but it won’t be subject to tax or penalty).

Submitted by Delete User on Mon, 2017-10-23 18:26

  • Had some issues with my old account and I couldnt get email reset password
  • But yes, I meant to say taxable, the IRA part was typo. Just too many mention of IRA and I got that stuck when i wrote it!
  • And thanks for that notification that its an early distribution! I’ll be sending out my 2016 5329 & paying the late penalty online today. I’ll talk to Fidelity to early distribution withdrawl of $500 from my Roth to my taxable account.
  • You’ve been a great help to me, DMx & Alan!!! Let me know if they are anything that I can contribute to this site, or to you guys. 🙂

Submitted by Delete User on Mon, 2017-10-23 22:13

  • For Alan, you mention that “Your final form is actually the 8606, not a 5329. Line 22 should show the total balance of regular Roth IRA contribution in your Roth IRA. That is probably far more than the $500 you are withdrawing, but you need to get that amount correct. The Roth custodian send you a 5498 every year that you make a regular Roth contribution indicating the amount, but it is up to you to keep a record of the accumulated total (less any distributions you have taken from your regular contributions balance”. 
  • At first, I though my line 22 would be $5500-$500 = $5000 but than I saw Line 22 on IRS form mentioning ” If you didn’t take a Roth IRA distribution before 2017 (other than an amount rolled over or recharacterized or a returned contribution), enter on line 22 the total of all your regular contributions to Roth IRAs for 1998 through 2017 (excluding rollovers from other Roth IRAs and any contributions that you had returned to you), adjusted for any recharacterizations.
  • So, if I prepare my 2017 8606, I would have only taken distribution in 2017 tax year, and my line 22 would be the total of all my regular contributions to Roth ($5500 in this case). Which is correct in what DMx mention regarding how much I need to fill for that Line 22. If I have taken distribution again in the future, that Line 22 get confusing/complicated very quickly as far as I can see (refering 3 different tables to calculated it!
  • Sending our my 2016 5329, pay my $30 penalty tax online, and I’ll give Fidelity a call tonight to get  withdraw to my taxable account.
  • Thanks for listening to me ramble!

Submitted by Alan - IRA critic on Tue, 2017-10-24 00:10

Yes, line 22 of Form 8606 should be 5500. Since that amount is larger than your distribution lline 23 will be 0. In the future your basis of regular Roth contributions will be 5000 because you will have removed 500 of your Roth contribution balance.

Submitted by Delete User on Tue, 2017-10-24 01:05

  • I finally got that part of it for Line 22 on 8606! Yep, It should be $5000 since I’ve removed $500 of my contribution from it.
  • Maybe I should create a new topic, but checking my 5498 from the IRA people, I’ve made 2 tIRA contribution without filing any taxes.
  • $1000 in 2015, $500 in 2016 (the one with the excess that I’m trying to fix). I could have deducted the one in 2015 but I never did (someone was doing my paperwork, and I didn’t mention it) and I could deduct the one in 2016 (could I still?). Do I still need to sent them a late 8606 before 2017 tax year? or could I just ignore it, and double pay taxes if I need to when I withdraw in the future? Someone even suggest just converting them into Roth.
  • I’ve already mail in my 5329 (it’s in the mailbox, so at best I could retrieve it if i need to before it ship the next day)
  • With the amount of paperwork involved in tIRA, maybe I should think of just converting my tIRA to Roth to simplify it in the future…

Submitted by David Mertz on Tue, 2017-10-24 02:17

  • Line 2 of your 2017 Form 8606 should be $5,500 as both of us have said.  After the regular distribution of $500 of that $5,500, $5,000 is the amount of contributions that will remain in the Roth IRA that can be distributed tax free in the future prior to you reaching age 59½.
  • You can file an amended 2015 tax return to claim the deduction for the $1,000 for 2015.
  • Since you are filing a 2016 Form 5329, you can at the same time file Form 1040X to claim the deduction for the $500 tIRA contribution for 2016.
  • (A reminder:  The $500 contributed to the tIRA is not the excess contribution.  The excess contribution is $500 of the $5,500 contributed to the Roth IRA for 2016.)

Submitted by Delete User on Tue, 2017-10-24 02:26

  • Cool, neat. I know about the 1st bullet point about Line 22 of my 2017 8606 and yep since my regular distribution (withdraw) of $500 from the $5500, it’ll be $5000 is what I have contributed to Roth IRA that is tax-free in the future.
  • For filing the old 2015 amended tax return, is it just 1040X and nothing else?. Same for the 2016 1040X? If I do file amended 1040x (never complete a 1040 myself before much less 1040X), is there an deadline for my deduction? I know I qualify for the IRA deduction. 
  • Are they less paperwork heavy that could be completed or regardless, I still need to amend my my 2015/2016 Tax return with 1040X?
  • Thanks for the reminder on the $500 contribution of tIRA is not excess, the roth is. 

Submitted by Delete User on Tue, 2017-10-24 04:49

  • Easier than I thought but the calculating the taxes was annoying (I had to use Qualified Dividends and Capital Gain Tax Worksheet). Got $45 back from IRS at least. And pay $30 for excess contribution.
  • Other than the 2016’s 5329 and 1040x, I don’t need to include anything else alongside the amended return, right? Just to be safe, I’ll include my 2016’s 5329, 1040x, and the 5498.
  • I’ll do 2015 in a later period (before 2017 ends)

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