2018 Roth IRA contribution to much

Submitted by MIKE KRUCHTEN on Thu, 2019-05-16 13:59

Client who is age 55 made a 2018 Roth IRA contribution of $6,500 but MAGI only allows $2,500, therefore over $4,000.
Client has filed 2018 Fed tax return but MAGI in 2019 will allow full 2019 Roth IRA contribution.

I’m trying to understand the particulars in processing the excess contribution?

1) If client filed an amendment of 2018 return could she still recharacterize the overage to a 2018 Trad IRA or the fact that she filed limits this now? Seems I have read clients have until Oct 15th to recharaterize but feel it’s specific to extensions and not amended returns.

2) Pull the 2018 $4,000 overage out by Dec 31st 2019, pay 6% only on overage and not profits then manually place the $4,000 as a 2019 contribution. Seems their is no rush in pulling the overage and replacing as 2019 if profits dont have to come out and 6% tax seems a certain since we didn’t get out by April 15, 2019.

Am I missing another option or method to bring 2018 overage to 2019 without 6% penalty?



Submitted by Alan - IRA critic on Thu, 2019-05-16 15:09

  1. The recharacterization deadline is 10/15 (extended due date) as long as the taxpayer either files an extension or files their return by 4/15. In this case there would be a partial recharacterization, but the 4000 will probably be a non deductible TIRA contribution that would need to be reported on a 2018 8606 form. The 1040X could also include an explanatory statement regarding the partial recharacterization.
  2.  If the excess amount is returned with any earnings instead of recharacterizing, there will be no excise tax but any gain will be taxable in the year IN WHICH the contribution was made. There is also a 10% penalty on any earnings, therefore if the contribution was made in 2018, the earnings and penalty would go on the 1040X.
  3. Yet another option since client will qualify for a full Roth contribution in 2019 is to leave the excess in and apply it to 2019 on Form 5329. Earnings remains in the Roth, but in this situation the 6% excise tax will be due on Form 5329. This option works best if there were large gains on the 4000, large enough so that the excise tax would be less than the income tax and penalty on the gains. This usually requires a gain of 25% or more. If so, the custodian does not need to be contacted since the excess is applied on Form 5329.
  4. Option will have to be chosen and executed because the choice will affect the 1040X.

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