Excess Roth IRA contribution in 2018

Submitted by alberto vega on Tue, 2019-07-30 00:52

Obtained a client which are married ages H 72; W 67 and already filed their 2018 MFJ tax return. AGI $210,000 including W salary of $1,500; H had $0 salary. Discovered W made a contribution of $ 1500 to a new Roth IRA in Oct 2018 expecting their AGI would have been less than actual and therefore the Roth IRA contribution would have been ok. However they had to pay a $90 (1500x.06) penalty in 2018 for the Roth IRA contribution in excess of Roth IRA income limit. It is not worth now to file an amended return for 2018 and withdraw now the ROTH IRA contribution and earnings earned up to date. it would cost them more than the IRA $90 penalty to do and file an amended 2018 return. What can they do in 2019 to not continue to pay the $90 penalty:

1. Withdraw, before 12/31/19, the $1,500 Roth IRA contributed by W and earnings thereof up to date of withdrawal.
2. If W opened a separate Roth IRA account in 2018 for this contribution, just withdrawing the balance in that specific account would be enough to correct the issue and not pay any penalty in 2019 since both the principal and earnings would be withdrawn in 2019.
3. If W added this $ 1,500 Roth IRA contribution to another existing ROTH IRA opened years ago. How do you compute the earnings related to the $1,500 to withdraw the correct amount of principal and interest to stop the $90 penalty in 2019 and in the future.
4. How would this transaction be reported in 2019 in their tax return.



Submitted by Alan - IRA critic on Tue, 2019-07-30 01:23

  • The excess contribution penalty for 2018 has been paid and for the reasons stated, client does not want to have the contribution returned by 10/15/2019 with applicable earnings. Nor can it be recharacterized as a TIRA contribution due to being 70.5 in 2018.
  • To eliminate any more excess contributions, the client simply needs to withdraw 1500 from the Roth and file Form 5329 which will show the distribution and elimination of the excess amount. Earnings will remain in the Roth because the excise tax has been paid and the correction is being done after the extended due date. Form 8606 does not need to be filed if the Roth is qualified (held 5 years). Client cannot roll over the 1500 to another Roth, but client could make a new Roth contribution for 2019 if client has earned income and MAGI is not too high as it was in 2018. 
  • Again, ignore earnings or loss and only remove 1500 flat. There is no income tax on the 1500, and no excise tax for 2019 or beyond.

Submitted by alberto vega on Tue, 2019-07-30 15:17

What about is this particular Roth IRA has been held only since 2018, ie 1 year.  However the client has otherRoth IRAs  that has been held for 5 years or more.  What can be done in this scenario

Submitted by Alan - IRA critic on Tue, 2019-07-30 15:37

The 5 year holding period starts with the first Roth contribution to ANY Roth IRA account. Therefore, all client’s Roth IRAs are qualified and the withdrawal of 1500 will be tax free. For that matter, the withdrawal can come out of any of client’s Roth accounts because earnings are not being distributed with the 1500. Client should not even mention an excess contribution to the Roth custodian, just request a withdrawal of 1500. This needs to be done before year end to avoid a 2019 excise tax.

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