excess roth contribution
The taxpayer (under 59 1/2) made excess Roth contribution in the amount of $6,000 for year 2020. There is earning of $2,000 associated with this excess contribution.
SInce it is past the extended due date of the 2020 return, it appears corrective distribution is not available. Future year income is projected to be high so that carryforward the excess to future years to be absorbed by future years does not appear an option.
It appears the taxpayer should consider an ordinary distribution in the amount of $6,000 by 12/31/2021. This distribution will completely offset the excess contribution. A Roth distribution is deemed to come out first from the investment portion. So the distribution, even though it is a non-qualified distribution, should not be taxable. However, the taxpayer will have to pay 6% excise tax on the excess contribution for year 2020 (6% of $6,000 = $360). It is my understanding there is no need to distribute the earning portion and leaving the earning portion inside the Roth account has no additional adverse tax consequences.
If you can comment on the above and correct me for any errors, if any, will be great.
Thank you.
Permalink Submitted by Alan - IRA critic on Tue, 2021-12-21 17:33
You are exactly correct. Taxpayer just needs to request a distribution of 6000 ASAP to beat the year end deadline and another year of 6% excise taxes. Taxpayer should not even refer to an excess since this distribution will be reported on the 1099R with code J, but will not be taxable under the Roth ordering rules. Form 8606 needs to be filed to report the non taxable Roth distribution. In fact, when there is a large gain such as the 33% in this case, taxpayers will often intentionally not do a pre deadline return of excess since the 6% excise tax is less than the income tax and penalty on the amount of earnings.
Permalink Submitted by Henry Chan on Tue, 2021-12-21 21:55
Regarding the payment of 6% excise tax for year 2020, is it correct that amended 2020 return with Form 5329 is needed to be filed?