Overfunding ROTH in 2021

Submitted by Vickie Intriago on Wed, 2022-09-28 20:02

Client chose to make a 2021 ROTH IRA payment but now CPA is saying we overfunded it by $1200 because of income.
What if anything can we do ?



Submitted by Alan - IRA critic on Wed, 2022-09-28 20:29

  • If “payment” means an excess contribution, if the client either filed their 2021 return on time or filed a timely extension, they have until 10/17 to have the excess contribution of 1200 returned. They should tell the custodian that 1200 of their contribution is excess and the custodian will calculate the net gain or loss on that 1200 and distribute the net amount out of the Roth IRA. This will avoid an excise tax for 2021. If there is a gain, the amount of gain will be taxable in the year the contribution was actually made, and subject to 10% penalty if client is under 59.5. 
  • Another option is to have the 1200 recharacterized as a TIRA contribution, but that is not likely to qualify for a deduction. This is probably beneficial only if client does not have any pre tax IRA accounts, because they could then convert the recharacterized contribution to Roth tax free, except for any gains that were generated on the Roth contribution.

Submitted by Vickie Intriago on Wed, 2022-09-28 23:46

Client has pretax accounts . So, I guess the second option is out of the question.Please explain what TIRA .  I want to know what the abbreviation means.  

Submitted by Vickie Intriago on Wed, 2022-09-28 23:46

Client has pretax accounts . So, I guess the second option is out of the question.Please explain what TIRA .  I want to know what the abbreviation means.  

Submitted by Alan - IRA critic on Thu, 2022-09-29 01:21

TIRA = traditional IRA. Yes, with pre tax IRA balances the first option is preferable. 

Submitted by Vickie Intriago on Thu, 2022-09-29 19:53

So, if the $1200 is withdrawn and there is a loss what happens?  Also, what would happen if client just left the $1200 in the ROTH IRA?Or , Can she just withdraw the $1200 as a normal distribution?  There shouldn’t be any tax ramifications since it’s part of her base.

Submitted by Alan - IRA critic on Thu, 2022-09-29 20:18

To avoid an excise tax of 6% of the 1200, or $72 for 2021, the 2021 excess must be withdrawn net of gain or loss. The custodian will calculate the gain or loss based on the investment results of the entire Roth IRA. If there is a loss, taxpayer will get back less than the excess contribution. With a 10% loss the custodian would return 1,080 of the excess contribution. If the taxpayer just asked for a flat distribution of 1000, it would not cure the excess in the year the contribution was for, but if done in a later year, it would be reported on a 5329 and the excise taxes would stop in the prior year. Since this was a 2021 excess, just withdrawing 1200 now would not eliminate the 6% excise tax for 2021, but it would prevent that excise tax from being extended each year from 2022 and beyond. Also, if withdrawn net of gain or loss by the deadline, the distribution is not reported on Form 8606. If 1200 was withdrawn after the deadline (no gain or loss is calculated after the deadline), the distribution would have to be reported on Form 8606, although it would be non taxable. The 1099R is coded differently if an excess is distributed net of gain or loss before the deadline, than if a simple distribution of 1200 is withdrawn.

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