Roth IRA Excess Contribution

Submitted by Eddie Holland on Wed, 2018-03-28 22:02

I made a 2016 Roth IRA contribution of $6,500 on 4/1/17. However, I had no earned income in 2016 so I was ineligible to make a Roth contribution. I am retired and had no earned income for 2017, either. I plan to withdraw the $6,500 excess contribution from my Roth as quickly as possible. Do I need to withdraw the earnings (NIA) in the Roth over that period of time (4/1/17 to present) or simply withdraw the excess contribution amount of $6,500 while leaving the earnings in the account? If I am required to withdraw only the excess contribution of $6,500 then are the earnings (NIA) taxed when I make a subsequent withdrawal from the Roth?



Submitted by Alan - IRA critic on Thu, 2018-03-29 01:27

Assuming that you are not married and eligible for a spousal contribution, then you do have an excess contribution to remove. However, since the extended due date has passed for a 2016 contribution, you owe a 6% excise tax for 2016 ($390) and also for 2017 ($390). Since the due date has passed, you just request a distribution of 6500 and no earnings come out, just the 6500. The excise taxes are reported on Form 5329 for 2016 and 2017. If you take out the 6500 this year, there is no excise tax due for 2018, but you still have to complete a 5329 for 2018 to indicated removal of the excess. You also will need an 8606 to report the Roth distribution, but no taxes will be due because the distribution will come from your regular Roth contribution balance. Your earnings that stay in the Roth will be tax free once your entire Roth is qualified (age 59.5 and 5 years from first Roth contribution). If you take a distribution before that, the earnings in your Roth come out last,  so if you don’t touch the earnings before your Roth is qualified there will be no taxes on them.

Submitted by Eddie Holland on Thu, 2018-03-29 13:21

Thanks for the response, Alan.  You mentioned that I will owe excise tax for 2016 and 2017.  However, I made the contribution in 2017 (for the 2016 tax year).  I was under the impression that I would only owe excise tax for 2017 because I did not withdraw the excess contribution before year-end.  Is this not correct?  If not, since I made the contribution in 2017, could I have my custodian code the contribution as 2017 instead of 2016?  That would ensure that I would owe the excise tax for only the 2017 year.  Thanks again.

Submitted by Eddie Holland on Mon, 2018-04-09 21:07

In your reply, you state “Since the due date has passed, you just request a distribution of 6500 and no earnings come out, just the 6500.”  However, I have seen other interpretations that the earnings must come out, as well.  Can you provide any documentation from the IRS confirming that the earnings do not have to be withdrawn, please?

Submitted by Alan - IRA critic on Mon, 2018-04-09 23:22

Removal of the excess before the due date is addressed in Sec 408(d)(4). Earnings must come out with the contribution. Removal of earnings after the due date is addressed in Sec 408(d)(5). Earnings do not come out in that case. The extended due date has passed for your 2016 excess, and you owe a 6% excise tax on it, but the earnings stay in the Roth. Removal of the excess after the due date is also described in Pub 590 A, p 38. In any event even if you ask the custodian to calculate earnings on a 2016 excess, they know the due date has passed and they will not do it.

Submitted by Alan - IRA critic on Thu, 2018-03-29 16:39

  • No, not correct. Even though you did not make the 2016 contribution until 2017, line 25 of Form 5329 requires that you include the 2016 contribution in your 12/31/2016 balance even though it was not yet contributed. This is even true if you didn’t even own a Roth account on 12/31/2016. It would not have mattered if you had the excess returned with earnings by the due date, but that didn’t happen. Therefore, the 6% is due for 2016 and also for 2017 because the excess was still in the Roth on 12/31/2017. Form 5329 would have assinged the 2016 excess as a 2017 contribution if you had the earned income in 2017 to support it and you did not make a 2017 contribution, but you had no earned income in 2017.
  • The 2016 contribution was reported to you and the IRS in May, 2017 so it was final. If you had called the custodian between the date of the contribution and 4/18/2017 they could have reassigned it to 2017, but this cannot be done after that date.
  • Not to make it worse, but the IRS could also bill you for late interest on the late payment of the 2016 excise tax. As indicated above however, your earnings can remain in the Roth and will eventually be tax free, so that is a long term trade off for owing the excise tax. You may have pretty decent earnings on a contribution made early in 2017 and the earnings should continue to grow over time.

Submitted by Eddie Holland on Thu, 2018-03-29 17:49

for my records.

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