Earnings on excess Roth IRA contribution
What are the earnings on the excess Roth contribution of $7,000 made on 10/14/19 as of 2/28/21 given the following fact pattern:
Value per statement 9/30/1019 $219,790.79
Contribution 10/4/2019 $7,000.00
Roth conversion 10/4/2019 $50,559.54
Value per statement 12/31/2019 $296,579.56
Contribution 1/15/2020 $7,000.00
Roth conversion 1/16/2020 $100,428.05
Value per statement 12/31/2020 $442,307.19
Roth conversion 1/15/2021 $89,518.83
Contribution 2/22/2021 $7,000.00
Value per statement 2/28/2021 $540,442.64
My calculations are as follows:
a Excess contribution (9/30/19) $7,000.00
b Adjusted opening balance $277,350.33
c Adjusted closing balance $296,579.56
Factor (C-B)/B 0.069331929
Net income through 12/31/19 $485.32
a Excess contribution (9/30/19) $7,000.00
b Adjusted opening balance $404,007.61
c Adjusted closing balance $442,307.19
Factor (C-B)/B 0.094799158
Net income through 12/31/20 $663.59
a Excess contribution (9/30/19) $7,000.00
b Adjusted opening balance $531,826.02
c Adjusted closing balance $533,442.64
Factor (C-B)/B 0.003039753
Net income through 2/28/21 $21.28
Total net income $1,170.20
Permalink Submitted by David Mertz on Tue, 2021-03-09 23:20
The calculation result is irrelevant because the deadline to obtain a return of contribution before the due date of the 2019 tax return, including extensions, was October 15, 2020. Correction of the excess contribution for 2019 in 2021 is done by making a regular distribution of $7,000 and leaving any earnings in the Roth IRAs. Excess contribution penalties on the $7,000 are due for 2019 and 2020.
Permalink Submitted by Alan - IRA critic on Wed, 2021-03-10 00:21
Using the IRS approved NIA formula, I come up with earnings of 861. This formula does not adjust for each individual contribution, it just adds them all to the adjusted opening balance. However, almost all custodians have their own software program to do the calculation. Nonetheless, it is nice to pre check your earnings in order to determine how you want to correct an excess contribution.
That said, it is too late to remove a 2019 contribution since the extended due date for a 2019 contribution was 10/15/2020. Removal with earnings or recharacterization as a TIRA contribution for 2019 cannot be done. The 2019 excise tax has been incurred ($420), but you could still remove the 2020 contribution with earnings to create space to apply your 2019 excess to 2020 if you are eligible for 2020. That would hold the excise tax to one year (2019). You need to determine if you qualify for a Roth contribution for 2020 and 2021 before determining the best approach.
Permalink Submitted by David Mertz on Wed, 2021-03-10 00:59
If the 2020 contribution is returned to make room to absorb the 2019 excess contribution, I calculate a NIA to the 2020 contribution as $558 (assuming that there was no change in account value between 12/31/2019 and 1/15/2020 and no change in value between 2/28/21 and today; using actual values on 1/15/2020 and the date of the return of the contribution could change the result slightly).
The gains are low enough that it’s reasonable to consider obtaining a return of the contribution made for 2020 and applying the 2019 excess as the 2020 contribution, avoiding the $420 excess contribution penalty for 2020 at the almost certainly lesser expense of roughly $558 of taxable income on the 2020 tax return that is also subject to a 10% early-distribution penalty if under age 59½.
If the NIA to the 2019 contribution had any relevance, I get essentially the same result of $860.