Roth IRA Overcontribution Penalty
I have a client that is over the income limit to make a contribution to a Roth. He has a Roth outside our firm that he keeps contributing to and says that the company keeps letting him contribute. What are the reporting requirements annually for his contributions and what is the long term risk/tax penalty he is opening himself up to? Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2018-05-02 15:51
The custodian has no idea whether excess contributions are being made unless more than 5500 is contributed to that custodian’s IRA. An excess Roth contribution incurs a 6% annual excise tax for each year with no statute of limitations. An excess amount not over the statutory limit can be resolved by recharacteriziing the contributions before the extended due date as TIRA contributions, or the excess can be removed with allocated earnings prior to the extended due date. Once the due date passes, the 6% excise tax is incurred for the contribution year, and a subsequent removal would not include earnings. Form 5329 is used to report the excise tax and also distributions done after the due date that reduce the excess amount for excise tax purposes. Form 8606 is also used to report distributions after the due date for income tax purposes. The IRS is currently not advising taxpayers of excess contributions, they are just letting them build up, and it remains to be seen if the IRS will get control of this situation. If and when they do, it is not possible to predict how far back they will go. Note that Form 5329, in addition to reporting the excise tax for each year will apply excess amounts to later years where a taxpayer is eligible for a Roth contribution that was not made if a TIRA contribution was also not made. It will also apply ordinary distributions from the Roth to reduce the outstanding excess amounts. IRA custodian report the total of all regular contributions made for a year in May of the following year on Form 5498, so the IRS knows the total amount that was contributed. Finally, if an excess is removed later and the excise taxes paid late, the IRS will likely bill late interest on the excise tax payments that can also add up.
Permalink Submitted by Ryan Smith on Fri, 2018-05-04 13:15
Fantastic, thanks for your thorough response!!