Roth Removal of Excess Contribution After Filing Deadline

Submitted by Paul Avegno on Mon, 2017-12-04 23:14

I’m having trouble finding clear guidance on the following: Individual (age 68) contributed to a Roth for 7 years, but was only eligible to contribute in year one. Year 7 excess contribution and earnings were removed prior to the tax filing deadline. From what I have read, the remaining excess contributions (years 2-6) need to be removed and are assessed a 6% excise tax penalty for every year the funds are not removed. My question: What taxes and/or penalties should be applied to the earnings (investment appreciation) from the excess contributions?



Submitted by Alan - IRA critic on Tue, 2017-12-05 00:45

Removal of earnings and paying the 6% excise tax are mutually exclusive. Because the individual will owe the excise tax for those 5  years of excess contributions, the earnings stay in the Roth without tax or penalty. Just request the distribution of the total excess amount only. Form 5329 must be filed for 6 years to pay the cumulative excise taxes and the 6th year will show the distribution that reduced the excess amount to 0. Form 8606 will report the distribution, which should be non taxable as a return of contributions.

Submitted by Paul Avegno on Fri, 2017-12-08 18:01

Thank you for the clarification.  Would you also verify that there should be no state tax or penalty?

Submitted by Alan - IRA critic on Fri, 2017-12-08 18:25

No state tax or penalty except for the earnings on the year 7 corrective distribution. That will be reported on a separate 1099R from the larger distribution. Note that if the year 7 contribution was made IN 2016, the 1099R reporting the corrective distribution will be coded to indicate that the earnings are taxable in 2016, not 2017. If contribution was made in 2017, earnings will be taxable on 2017 return, fed and state.

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