Excessive Roth contributions

Submitted by Robert Roselli on Wed, 2021-03-03 17:26

My client contributed $ 1,600 to his Roth for 2020 and he’s over the limit.

1) Does he have to remove the contributions plus earnings or can he pay the 6% excess and leave it there?
2) Are there any penalties if he already filed his 2020 taxes and now he has to amend the return?



Submitted by Alan - IRA critic on Wed, 2021-03-03 18:10

His choice whether to have the excess plus any earnings returned. Tax and penalty will be due on the earnings in the year IN WHICH the excess contribution was made. Therefore, if the excess contribution was made in 2020 any earnings returned will be reportable on the 2020 return, and it will have to be amended. If he chooses to pay the excise on Form 5329, then the earnings will remain in the Roth. But the excise tax repeats every year the excess remains. Form 5329 will apply the excess to 2021 if client leaves room and qualifies for a 2021 Roth contribution. Otherwise, client will have to withdraw the 1600 (but not earnings) by the end of 2021 to avoid a second year of excise taxes.

Submitted by Robert Roselli on Thu, 2021-03-04 16:26

If he recharacterizes his Roth back to his non-deductible Traditional IRA, wouldn’t he avoid the tax and penalty?He put in $ 1,600, so the penalty is $ 96. What amount will he have to pay tax on if he leaves it in there? 

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