How to correct excess ROTH contributions made in 2006, discovered in 2018

Submitted by Margery Perko on Wed, 2018-04-25 02:12

Hi–I am covered by a retirement plan (TSP) at work so have occasionally contributed to non-deductible traditional IRAs. As I look thru my records I see that I erroneously made a $4,000 contribution to a ROTH IRA in 2006 which is all in excess as my AGI ($116,000, single, no dependents) is over the limit of $110,000. Since 2006 I have made no other contributions to this ROTH IRA but I did make a few non-deductible IRA contributions in 2012 and 2013 and 2015. Do I really need to go back and pay the 6% excise tax in the contribution year of 2016 and then for each year the $4,000 remained in the ROTH account (2007-2018). I have recently moved $4,000 from the ROTH to my traditional IRA for tax year 2018. (did not catch the problem time for 2017 IRA contributions)



Submitted by Alan - IRA critic on Wed, 2018-04-25 03:36

  • Yes, you made an excess Roth contribution in 2006 which results in a 6% excise tax for each year, however if you qualified for a Roth contribution in any year thereafter which you did not make (nor did you make a TIRA contribution), your excess amount would be applied to the first year you were eligible. This is all handled on Form 5329. So perhaps the excess was corrected in one of those years. It would also have been corrected if you took a Roth IRA distribution in similar fashion and that also would be addressed on Form 5329. 
  • Your ND TIRA contributions only affect this by eliminating those years from correcting the Roth excess.
  • I don’t know what you did this year, since you cannot move Roth IRA money to a TIRA unless you recharacterized a 2018 regular Roth contribution as a TIRA contribution. If that is what you did it’s OK, but to correct your excess Roth amount you need to withdraw 4,000 from your Roth IRA. That would end the 6% excise taxes in 2017, but that still leaves 12 years of excise taxes, 12 5328 forms to report them, and 12 6% excise taxes due. The IRS would likely also bill you late interest for these amounts due. There is no statute of limitations for excess contributions, so legally the IRS could come back anytime and bill you for the excess amount. That said, if they have not done so after 12 years, they are not likely going to catch this. Please clarify exactly what you did this year with the 4,000 Roth distribution. Did you just withdraw it from your Roth and then use the money to make a new 2018 TIRA contribution?

Submitted by Margery Perko on Fri, 2018-05-18 20:18

Upon further review, the excess Roth contribution was made in 2005 and the amount of excess was $2490. (I had a large capital gain taht year that made my income higher that I expected, thus the excess contribution) In subsequent years my income was such that I was not eligible to make any Roth contributions.  I made a non-ded TIRA contribution in 2009, and subsequent years but I do not think that matters any.  When I discovered this excess and spoke with a Vanguard rep I thought he said that he was going to move the excess to another account but I see no record of any transaction so the excess remains.  Vanguard provided a form to move the excess out.  Should I move the excess out?  Will that likely flag the IRS to go back and catch my excess contribution and invoke at the 6% fees plus interest, etc since 2005?

Submitted by Alan - IRA critic on Fri, 2018-05-18 20:55

  • If you are sure there was NO year since 2005 for which you might have qualified for a Roth contribution, but did not make that contribution and also did not make a TIRA contribution, you choices are as follows.
  • Even though there is no statute of limitations for excess contributions, you could gamble that if the IRS did not notify you for 13 years, they are not going to, and therefore do nothing.
  • Follow the correct solution which includes requesting a distribution of 2490 (no earnings), and filing Form 5329 for each year starting in 2005 and paying the 6% excise tax. That would total up to 1942 plus whatever late interest the IRS billed you. The distribution itself would be tax free, but reportable on Form 8606.
  • Compromise solution – Withdraw the 2490 to stop adding more years to the 13 years, but do not file Form 5329 with the excise taxes. Should the IRS notify you later about the excess amount, you would then file a 2018 5329 showing removal of the contribution and the excise taxes would stop with 2017, but interest charges could still mount. If you withdraw 2490, it would not be a red flag since if the IRS took note of your 2005 excess, they would have notified you long ago. The 1099R reporting the distribution would not be coded to show removal of an excess amount. If you opt for this approach, do not use whatever form Vanguard suggests, just ask them to distribute 2490. It sounds like the rep you spoke to did not understand the problem or was not properly trained. A distribution is coded as a corrective distribution for a 2005 excess ONLY if you removed that excess with earnings by 10/15/2006.

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