Excess Roth Contributions

Submitted by Jared Houseman on Tue, 2018-07-10 19:32

Maximum allowed (too high of a MAGI) Roth contribution for 2017 of $2,075, but $3,450 was contributed. Excess contribution of $1,375. If corrected before October 15th, 2018 the Net Income Attributable to the $1,375 excess contribution is $340, which after taxes and early withdrawal penalty would cost $129 in taxes on the gain. If we wait until after October, 15th 2018 and just remove the excess contribution (no earnings) the 6% excise penalty on $1,375 is $83. Does it really save $46 to wait until after October 15th, 2018 to correct the excess contribution because we had such a great market return in 2017?



Submitted by Alan - IRA critic on Tue, 2018-07-10 23:17

Yes, the savings is due to the outsize gain % on the excess amount. Another advantage of either removing just the excess and no earnings is that the taxable earnings in 2017  (if the contribution was made IN 2017)  would be reportable on the 2017 return or amended return and that would further reduce the allowed contribution leaving a small excess contribution remaining. So either removing just the excess and paying the 6% OR applying it to the 2018 contribution instead of removing it will eliminate the income phaseout excess problem and also eliminate a 1040X for 2017 if you have already filed. The 5329 for 2017 can be filed by itself if you have already filed 2017, but you will also need a 5329 and 8606 for 2018 to report the distribution and show elimination of the excess.

Submitted by Jared Houseman on Wed, 2018-07-11 13:52

So if we wait until October 15th, 2018 to remove the excess contribution (no earnings) in order to just pay the 6% we can only submit a 2017 Form 5329, right? The 2018 Form 5329 and 2018 Form 8606 isn’t available until 2019. But the excess contribution will have been paid before 12/31/18 so there wouldn’t be another 6% penalty assessed, right? Thanks!

Submitted by Alan - IRA critic on Wed, 2018-07-11 16:56

Yes, you can file the 2017 5329 to pay the 6% excise tax now, and the 2018 5329 along with your 2018 return next spring. As long as your contribution is generating earnings which stay in the Roth, you might as well wait until mid December before withdrawing the excess amount. There will be no excise tax due with the 2018 5329 as long as you take that distribution before year end. When you request it just ask for the dollar amount, no need to even mention that it is an excess contribution removal. The 1099R will be coded like a regular distribution, but will be non taxable on Form 8606 under the ordering rules.

Submitted by Jared Houseman on Wed, 2018-10-31 15:26

She also had some excess contributions in 2015 and 2016 too. I know the 6% penalty is calculated cumulativly year over year meaning that you add last years excess contirbution so the penalty snowballs. But when it comes to correcting it and removing the excess contributiuons you don’t stack those, right? For example, she had $242 excess in 2015, $1,019 in 2016, and $1,375 in 2017. So she needs to remove $2,636 to correct, right? Not a cummulative $4,139 which is what the penalty is based off of, right? 

Submitted by Alan - IRA critic on Wed, 2018-10-31 20:43

  • That is correct. The corrective distribution would be 2636, which is the total of the excess contribution amount for each year. Note that the 2018 5329 will automatically apply any portion of the accumulated excess amount as a 2018 contribution to the extent she is eligible for a 2018 contribution that she did not make. That would eliminate the need to ask for a distribution. If not eligible or if she already made her full 2018 contribution she is eligible for, then the 2636 needs to be distributed.  None of this changes the 5329 forms prior to 2018. 
  • Put another way, when Form 5329 is completed correctly, there are two ways that it fixes a prior excess contribution – either withdrawal of the excess OR applying the excess to the current year. Applying to the current year is easier because it eliminates the need for the withdrawal and reporting the distribution on Form 8606.  It is also possible the form will apply only SOME of the excess, reducing the remaining amount that must be distributed. Either way, the gains on these contributions are protected and remain in the Roth.

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