2021 Roth IRA Excess Contribution

Submitted by Brandon Blanchard on Tue, 2023-02-28 20:37

My client and his wife each made a $6,000 2021 Roth IRA contribution ($12,000 total) on 4/18/2022.

In July of 2022 their CPA discovered that their 2021 MAGI was in the phase out range so their allowable Roth IRA contribution for 2021 was only $2,720 each (not the full $6k each). Thus, they both contributed $3,280 of excess contributions.

My client has requested that we resolve this issue now even though he was aware of it back in July 2022.

As of right now the $6,000 investment made in each of their Roth IRAs in April 2022 is actually down about 2%.

We need to prepare paperwork for the clients to remove their $3,280 of excess contributions. Do we need to remove exactly $3,280 or perhaps a lesser amount since the investment has declined in value since the contribution? What if the market goes up over the next week before paperwork is prepared? Would they have to withdraw $3,280 and any earnings on that excess contribution?

Does the answer depend if they paid a 6% penalty on the excess contribution?



Submitted by Alan - IRA critic on Tue, 2023-02-28 20:59

  • Since the extended due date for a 2021 excess has passed, the client’s each will owe a 6% excise tax on the excess amount on a 2021 Form 5329. A 2022 5329 also needs to be filed to to determine if any of the 2021 excess can be applied to 2022 or not. If not, an additional excise tax will be due for 2022 as well. When the excess tax is incurred and the excess corrected after the due date, there is no calculation of gain or loss on the excess contribution. If the excess is then corrected by removal, just the exact amount of excess is distributed.
  • But first, the 2022 5329 should be completed in case the excess can be applied to 2022. That would eliminate the excise tax for 2022 and avoid having to take an actual distribution from the accounts. If a 2022 contribution was made that is allowed due to income falling below the limit in 2022, enough of that contribution could be returned with the earnings calculation as this would open up 2022 contribution space to allow absorption of the 2021 excess into 2022. That would eliminate the 2022 excise tax. 
  • Not addressing the situation a year ago was a mistake that has complicated the correction process, although the odds are probably that the 2021 excess cannot be applied to 2022 and would then have to be corrected by 3280 distribution before year end to avoid a 3rd year of excise taxes.

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