Excess Roth penalty/tax question
Client made excess Roth contributions in 2015.
• They made a $5K excess ROTH contribution in 2015.
• In 2020 they took a corrective distribution of $5K.
• I questioned why they didn’t also distribute the earnings (as that is what I have dealt with in the past is a following year distribution where we pay tax and penalty on the earnings).
I thought that they would have to distribute the excess contributions plus the earnings (Paying tax and penalty on the earnings) as well as paying the 6% tax per year (going back to 2015) on form 5329.
Any guidance?
Permalink Submitted by Alan - IRA critic on Mon, 2021-03-22 21:33
If an excess was made for 2015, the deadline to remove that excess with earnings and avoid the 6% excise tax is 10/15/2016, the extended due date for 2015 returns. Once that extended due date passes, an excise tax has been incurred for 2015 and for each year thereafter that the excess has not been removed.
The excise tax and the withdrawal of earnings are mutually exclusive. If you owe the excise tax, they your earnings remain in the Roth. This client owes the excise tax for 2015-2019 because they did not remove the excess until 2020. But their earnings stay in the Roth IRA.
Pub 590 A describes these two situations. 1) Removal of excess with earnings by the due date and 2) Excess removed after the due date.
Client will have to file a 5329 for each year. Besides removing the excess, the 5329 will also eliminate the excess by “absorption”. This means that if client was eligible to make a Roth contribution of 5000 in 2016 or later year and did not make an IRA contribution for that year, the 5000 excess would be absorbed into that year and the excise taxes would end. If the excess is ended by absorption then no distribution is needed. When completing these 5329 forms from 2015 on, client might discover a year where the excess could be applied on line 19 of the form, and if so that would end the excise tax with the year before that year. But then the 5000 distribution would no longer have been necessary in 2020.