Correcting past years excessive Roth IRA contributions
I made excessive contributions to a Roth IRA as follow:
2013: $170.00
2014: $950.00
2015:$950.00
2016: $950.00
2017: $950.00 but this was removed before tax deadline plus earning.
Do I have to remove the earnings for years 2013 – 2016 or just the original contributions?
Permalink Submitted by Alan - IRA critic on Tue, 2018-05-29 18:54
Since you are removing the excess AFTER the extended due dates, you only request a distribution of the excess amount. Any earnings stay in the Roth IRA. When you owe the 6% excise tax for each year’s accumulated excess, earnings are not distributed. Note that any distributions you may have taken since 2013 would have reduced your excess balance, but you probably did not take prior distributions. If so, just ask for a distribution of 3,020 and do not even mention to the custodian that you had an excess contribution. This distribution will be reported on your 2018 return on Form 8606 and should not be taxable since it comes from your balance of regular Roth contributions. However, you also need to file Form 5329 for 2013-2018. For the 2013 you owe 6% on 170, for 2014 you owe 6% on 1120, 2015 6% on 2070, 2016 6% on 3020, 2017 6% on 3020. Your final 5329 with your 2018 return will show that you removed the excess leaving you with no excess amount and therefore you will not owe any excise tax for 2018. The IRS could bill you for late interest due to late payment of these excise taxes. You will also owe tax and penalty on the earnings received when you removed your 2017 excess. This requires an explanatory statement but the taxable gains go on line 15 of Form 1040 with the 10% penalty on the gains on line 59.
Permalink Submitted by Earl Mckenzie on Tue, 2018-07-10 00:26
I believe that I read somewhere that we could take money from the Roth IRA if it was going towards education or tuition. If this is true, if I take money out to pay my daughter’s college tuition would that amount go towards reducing my excessive contribution for the past years. I need to remove about $3,300 for her tuition.
Permalink Submitted by Alan - IRA critic on Tue, 2018-07-10 01:25
You can take a Roth distribution anytime. Roth distributions follow the ordering rules and come first from your regular contributions. If you have excess contributions in your Roth, a distribution will reduce that excess balance in the year of the distribution, and any excise taxes will end in the prior tax year on the amount distributed. Form 8606 must be filed to report the distribution even though it will be non taxable. Form 5329 must also be filed to show the reduction of the excess (in this case to 0) amount. The only significance of the higher education expenses here is if the distribution was large enough to include earnings, there would be no 10% early withdrawal penalty on the earnings amount, but your distribution probably does not include any earnings under the ordering rules.
Permalink Submitted by Earl Mckenzie on Mon, 2018-07-16 11:18
The form states it will be a premature distribution which makes it subject to the 10% early withdrawal penalty. Is this correct? No where on the form is education listed as a reason.
Permalink Submitted by Alan - IRA critic on Mon, 2018-07-16 15:55
There will not be a 10% penalty because the amount you are withdrawing is non taxable. It comes from your balance of regular Roth contributions, which can be withdrawn anytime without tax or penalty. Again, the higher education exception is immaterial since you are not withdrawing conversions or earnings, just the amount of your excess regular contributions. You will get a 1099R and will report the distribution on Form 8606. On line 22 enter your basis in regular contributions (the total amount of regular contributions in the Roth). Since that figure will be higher than the amount you are withdrawing. Line 23 will be 0, and you are done.
Permalink Submitted by Earl Mckenzie on Mon, 2018-06-04 01:13
My cpa is saying the prior year earnings also need to be removed. How do I show her that this is not correct based on what I have learned here.
Permalink Submitted by Alan - IRA critic on Mon, 2018-06-04 02:50
You could refer her to Sec 408(d)(5), which deals with removal of excess contributions after the due date.Of course, if you ask an IRA custodian to return an excess contribution for any year prior to 2017, they will not include earnings in the calculation because there systems are set up to follow the tax code.
Permalink Submitted by David Mertz on Mon, 2018-06-04 15:27
Not removing the earnings (which, as Alan said, is correct for a distribution of the excess after the due date) is also consistent with the result an individual would get if the individual was eligible for a subsequent-year IRA contribution and the individual chose to apply the excess as a subsequent-year contribution. Earnings on an excess contribution are not themselves an excess contribution.