Excess Roth IRA contribution
My client made an excess Roth contribution for 2019. Should she withdraw that contribution now or is it better to withdraw the 2020 contribution and apply the excess 2019 contribution to 2020?
My client made an excess Roth contribution for 2019. Should she withdraw that contribution now or is it better to withdraw the 2020 contribution and apply the excess 2019 contribution to 2020?
Permalink Submitted by Alan - IRA critic on Fri, 2021-03-05 14:57
Depends on the amount of gains on the 2020 contribution that would be subject to tax and penalty in the year the 2020 contribution was made compared with an additional year of the 6% excise tax. Some 2020 contributions have significant gains. Either way, one year’s worth of Roth contribution space will be lost.
Permalink Submitted by Greg Martinez on Fri, 2021-03-05 18:16
The gain associated to the 2019 contribution is larger becasue it has been in there longer and there was a gain not a loss between the time of the 2019 contribution and the 2020 contribution.
Permalink Submitted by Alan - IRA critic on Fri, 2021-03-05 19:28
Client has already incurred the excise tax for the 2019 excess contribution, which protects the gain on that contribution from being distributed. The 2020 contribution is totally separate, but can still be removed including earnings on the 2020 contribution only. This will result in tax and possible penalty on the gains distributed on the 2020 contribution, but it will limit the 6% excise tax to only the 2019 year on the 2019 contribution. Comparing the excise tax for 2020 on the 2019 excess to the amount of tax and penalty for removal of the 2020 contribution determines which is the better choice.