Roth IRA Excess Contribution: Timing Issues
Taxpayer contributed to a Roth IRA in 2020, and turns out it was more than their income.
Filed timely for tax 2020; and had received the automatic filing extension with initial tax payment.
1. Is Taxpayer supposed to withdraw the excess ($6,997) contribution? And to withdraw the earnings?
2. Is it still timely (that is, is it supposed to be done before 10/17/21, or has that deadline been adjusted to 6 months after the adjusted tax deadline of 5/17/21, or to some other date)?
3. If it’s not timely in that sense, do they still have the six months from the tax deadline of 5/17/21 to amend return under Section 300.9100-2? Or 6 months from from their extension filing date? Or what?
4. Can they avoid the excise tax by simply telling their broker to apply this contribution to tax year (calendar) 2021?
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 16:48
Why is the excess so much? Taxpayer had no earned income at all? Since the extended due date (10/15/2021) has now passed, the 6% excise will be due for 2020 on Form 5329.
The deadline has passed as it was 10/15, 6 months after 4/15. Therefore, correction of the excess must be done using the procedures for excess contributions corrected AFTER the extended due date.
Sec 300.9100-2 only applies if the excess is returned with allocated earnings by the extended due date, but that due date was missed here. The 1040 X itself did not have a 10/15 deadline, just the corrective distribution.
No. IRA custodians do not reapply contribution years, the taxpayer can do so using Form 5329. If taxpayer qualifies for a 2021 Roth contribution, Form 5329 for 2021 will automatically assign the 2020 excess amount to 2021. This does not eliminate the 2020 excise tax, but it will correct the excess and prevent a second excise tax for 2021, and eliminate the need to withdraw the excess before year end since it was applied instead. Custodians do not correct their 5498 forms for this, it is between the taxpayer and the IRS.
Put another way, the excise tax and removal of earnings are mutually exclusive. Since the 2020 excise tax has been incurred, any earnings on that get to stay in the Roth IRA and not be removed.