2018 ROTH CONTRIBUTION IN EXCESS

Submitted by MIKE KRUCHTEN on Wed, 2019-12-11 22:02

Client made a $6,500 Roth IRA contribution for 2018 but MAGI was to high. Client has also made a $7,000 2019 Roth IRA contribution. 2019 MAGI should be below income level to allow 2019 Roth IRA contribution. What are his options on correcting 2018 contribution? I feel he can process an excess contribution and remove the 2018 contribution and earnings. If so does he have 6% excise tax for 2 years and tax and penalty on earnings?

I’m led to believe another option is to leave the excess 2018 contribution in and apply it towards 2020. The earnings remain in with no tax or penalty and excise tax on amount for 2018 and 2019? If this option is accurate then IRA custodian needs not be contacted and clients reports on IRS forms? If so which forms would he use? He self prepares so wanted to prep him for process.

Thanks in advance for any help on options?



Submitted by Alan - IRA critic on Wed, 2019-12-11 23:15

  • It is too late to remove the 2018 excess contribution with earnings or recharacterize the contribution as a TIRA contribution. So client has already incurred the 6% excess contribution excise tax for 2018.
  • However, the best option for client from here is to request a flat 6500 distribution from the Roth BEFORE year end. That distribution will not be taxable and it will eliminate a 2019 excise tax, leaving client with only the 2018 excise tax. Form 8606 must be filed for 2019 to report the distribution and Form 5329 must be filed to report the distribution showing the excess from 2018 has been removed.
  • Client could also remove 6500 of the 2019 contribution with earnings to create room to apply the 2018 excess to 2019 on Form 5329. However, any earnings  will be taxable and perhaps subject to penalty and client is not even sure that 2019 MAGI will be low enough to absorb the 2018 excess.  Therefore, this might not work well even if earnings were negative.
  • Applying excess to 2020 not beneficial because there will then be 2 years of excise taxes @ $390 each.

Submitted by MIKE KRUCHTEN on Thu, 2019-12-12 00:59

Client only needs to remove the 2018 contribution but no earnings??? Since past extension date (10/15) the distribution would not be coded as removing excess but a non qualified since client not 59.5? Excess distribution would be basis therefore only tax is the 6% excise for 2018. If my assumptions are correct above then client not in bad shape considering  profit made on the $6,500 since deposit in early 2018 and profits get to stay in….. 

Submitted by Alan - IRA critic on Thu, 2019-12-12 04:24

That is correct. Client should not even mention an excess contribution, just request a distribution of 6500. Earnings remain in the Roth.

Add new comment

Log in or register to post comments