Roth IRA Excess & NIA Calculation

Submitted by ZPeter on Wed, 2023-05-24 13:12

A couple of questions regarding Roth IRA excesses from 2021, 2022, and 2023:

1. I have excess from 2021 that is still in my Roth IRA. I need to pay 6% of that for 2021 and 2022. Can I keep it in my account for the rest of 2023, and take it out before December 31, 2023, and avoid the 6% for 2023? Basically, if the excess is removed by the end of 2023 I don’t need to pay the 6% fee for that year, right?

2. I need to calculate the NIA (my Roth IRA custodians are unwilling to do it) and I want to make sure I’m doing it right (I will use a rough estimate of my closing account balance and update it before I file for the withdrawal). Here are my numbers / calculations:

Question: my first contribution that was excess was $100 (January 11, 2022). Afterwards, I had a prior year contribution made on January 28, 2022 (for $4,800). I include that prior year contribution in my Adjusted Opening Balance, correct? As even though it was a ‘prior year contribution’ for 2021, it was contributed after my first contribution in excess.

– Adjusted Opening Balance: $19,937
-account balance the day before first excess contribution: $8,837
-all contributions since that point (in 2021) until today: $11,100

– Adjusted Closing Balance: $16,158 (the prior’s day balance (I’ve never made withdrawals))

– Excess (for 2022): $5,900

So – NIA: ((16,158 – 19,937) / 19,937) x 5,900 = -1,118.33

When removing excess contributions this year, I remove: $4,782 (5,900 – 1,118)

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Permalink Submitted by Alan - IRA critic on Wed, 2023-05-24 20:30

Yes, you are correct. The excise tax due on the 2021 excess for 2021 and 2022 will not apply to 2023 as long as the actual amount of that excess is distributed by year end. You would then report that distribution on Forms 5329 and 8606 for 2023.
The timing of the above distribution will affect the NIA calculation for removal by the due date for your 2022 and 2023 excess amounts. If done after the removal of the 2022 and 2023 excess contributions, the adjusted closing balance in the NIA calculation will not have to be increased for corrective distributions taken in the computation period.
SInce it is too late for an NIA calc on your 2021 excess, the adjusted opening balance date is the date of your first 2022 excess contribution. Not clear if you made any 2022 contributions before making 2021 prior year contributions, but the NIA calc starts with your first 2022 excess contribution. You add all later contributions made, whether excess or not, to that opening balance to determine the adjusted opening balance. 8837+4900+5900 = 19,637 not 19,937. This difference is the only reason that your final number is different. If the 19,937 is actually correct, than your calculation of the negative NIA is also correct, You made have added wrong? The closing balance does not need adjustment because you have taken no distributions yet.
You are asking about the NIA calc for removal of your 2022 excess. That excess was 5900. The formula is 5900 x (16,158 – 19,637)/19637 = -.1772 5900 x -.1772 = -1,045 5900-1045= 4,855 returned to you.
If you also have a 2023 excess to be corrected later, the above distribution of 4855 will be added to the closing balance for that calc.

Permalink Submitted by ZPeter on Wed, 2023-05-24 20:43

Great – thank you!
I think I will wait to take the distribution for the 2021 excess until November or December, to allow it to continue making gains in my account. At that time, I will take out the 2021 excess along with my 2023 excess (plus gains or minus losses, as it’s possible we have some SE income still this year, and I don’t want to preempitely remove the excess if we end up have some earned income). I’m not sure what the penalty would be (if there would be a penalty) if we remove the excess funds for 2023 (which at the moment is $400, as we presume we won’t have any eligible earned income), but then we actually do have earned income that can be attributed to it…
So, we made our first 2022 contribution (which was our first excess contribution) at the beginning of January, then at the end of January made the prior-year contribution (for 2021) of $4,800. So, as you mentioned, we add all later contributions after that first excess contributions – so that would include the prior-year contribution, as it was made after the first excess contribution.
I should have clarified – I also have $400 of contributions that I made in 2023. So, 8837 + 4800 + 5900 + 400 = 19,937. That all make sense? 8837 (the prior day value before first excess contribution in 2022) + 4800 (the prior year contribution for 2021, made after my first excess contribution in 2022) + 5900 (total 2022 excess) + 400 (2023 contributions (also excess))
Thanks for the clarification! For 2022 excess withdrawal, the Closing Account Balance is just the latest balance of my account, correct? As I haven’t taken any distributions? Then, when I withdraw the 2023 excess (in a few months) I will add on this excess withdrawal (5900 – NIA) to that closing account balance, as you said.

Permalink Submitted by Alan - IRA critic on Wed, 2023-05-24 20:57

Yes, the closing balance is the actual balance just before the corrective distribution, since there were no prior distributions to add to it. Otherwise, the numbers agree as that initial $100 excess contribution for 2022 was part of the total $5900 excess.

Permalink Submitted by ZPeter on Thu, 2023-05-25 05:08

Thank you! One final question –

like I said, at the moment we have contributed $400 to a Roth IRA and don’t expect to have much earned income (as we live abroad and use FEIE). However, I think my wife may make about $120 in commission this year, which I suppose would count as SE income. Say we have $120 in SE income, $200 in dividends and a capital loss of $400 – that would basically make my AGI $-80… however, that original $120 of commissions would still count as valid earned income, right? Dividends and capital gains/losses don’t change earned income, even though they change AGI, right? And there would be no SE tax on it, as it’s under $400?

Permalink Submitted by Alan - IRA critic on Thu, 2023-05-25 14:07

What is the source of the commissions? If foreign, it must be excluded along with other foreign earned income such as wages. Use of the FEIE requires all eligible foreign earned income to be excluded, which would leave 0 such income since dividends and cap gains are not earned income, just AGI.

Permalink Submitted by ZPeter on Thu, 2023-05-25 14:38

The commissions would be from the US.

Actually, I have one more question regarding the IRA rules about more than one contribution for the year. In my case, in 2021 my wife made a $100 dollar contribution in January, a $4,800 prior year contribution right after, then another $4,800 current year contribution, then $100 contributions every month. All of those were excess (although the $4,800 prior year contribution would regard the previous year, 2022). However, I’ve read different things regarding when to start the computation period as there were multiple contributions that year. Would it be before the first contribution in January of 2022, or the last contribution in December of 2022 (both of which were excess contributions).

I’m referring to this: ‘In the case of an IRA that has received more than one regular contribution for a particular taxable year, the last regular contribution made to the IRA for the year is deemed to be the contribution that is distributed as a returned contribution under section 408(d)(4), up to the amount of the contribution identified by the IRA owner as the amount distributed as a returned contribution.’ (https://www.law.cornell.edu/cfr/text/26/1.408-11#:~:text=This%20attributable%20net%20income%20is,(2)%20Special%20rule.)

Permalink Submitted by Alan - IRA critic on Thu, 2023-05-25 15:33

OK, then the commissions are not eligible for the FEIE and therefore constitute earned income for Roth IRA contribution purposes. You could simply wait to determine this since there is plenty of time to correct any 2023 excess contribution.
The quoted paragraph is meant to address the situation when a portion of multiple contributions is allowed (not excess). In that case you would start with the most recent 2022 contribution and add prior 2022 contributions until you came to the date of the first contribution that was excess. But in your case all the 2022 contributions were excess and the computation period therefore begins on the date of the first 2022 contribution. Ignore any 2021 contributions when determining the computation period to correct 2022 excess amounts. I assume that you have confirmed with Form 5498 reports and/or Roth account statements that these multiple current year and prior year contributions were reported for the correct years on Form 5498. Contributions made in the 1/1 to 4/15 annual window where both current and prior year contributions can be made can sometimes be prone to the intended year being incorrectly assigned, and since that 2022 window is now closed, you would be stuck with the actual 5498 figures for the contribution year. That would affect the actual excess amounts from year to year.
Therefore, the computation period for correcting the 2022 excess begins with the first 2022 contribution made in 2022.

Permalink Submitted by ZPeter on Thu, 2023-05-25 16:11

Okay, great – that’s what I supposed.

I have confirmed with my 2022 form 5498, and the Roth IRA contributions are as suspected ($5900 total for 2022). I will confirm shortly with the 2021 form 5498 to make sure that prior year $4800 contribution was for 2021, but I suppose it was.
then – I wanted to confirm. You say above to ignore any 2021 contributions when calculating the NIA for 2022. What would I do with the prior-year 2021 contribution made in 2022, as it was contributed after my first 2022 excess contribution? I thought that I would include that in my 2022 NIA calculation, as in the calculation we spoke about yesterday.

Permalink Submitted by Alan - IRA critic on Thu, 2023-05-25 16:57

I stated to ignore the 2021 contributions with respect to determining the computation period starting date only, but they should still be included in the adjusted opening balance when calculating the NIA.

Permalink Submitted by ZPeter on Thu, 2023-05-25 17:24

Great, makes sense. Hey – I really want to thank you for your help. This has been a super stressful process and your responses have helped a ton. I keep saying ‘this is my last question’ but another keeps coming up, but hopefully everything is clear now! Just wanted to say a big thanks

Permalink Submitted by ZPeter on Thu, 2023-05-25 19:53

As I wondered, I’m back… so, since my IRS broker is making me calculate the NIA for the Roth IRA excess withdrawals, there seems to be a problem. Once I calculate the NIA and they send me back the withdrawal sheet for me to sign, it will take a few days before it’s processed and sent out to be withdrawn… (it seems like my broker that I’m in contact with is not my IRS broker – so my broker sends me the form, then I sign it, and they send it to my IRS broker). So, I’m concerned that in that time the Closing Account Balance will have shifted, as the day the ‘Return of Excess Contribution’ is actually sent (by the IRS broker) will be different than it was the day I filed for the return of excess. Any thoughts?

Permalink Submitted by Alan - IRA critic on Thu, 2023-05-25 20:18

That’s unavoidable whenever the custodian does not calculate the NIA and process the distribution concurrently. While there has always been a few of these custodians, the IRS has never been concerned with the value fluctuations that occur between the time of the IRA owner’s NIA calculations and the actual delayed processing of the distribution, so nothing to worry about.

Permalink Submitted by ZPeter on Fri, 2023-05-26 06:17

I just realized something that may be a small problem… So, I have the prior day closing balance of the day before my first excess contribution (which is 8,837.02), made January 18, 2022, to calculate the Adjusted Opening Balance. Then, shortly after that (January 28, 2022) my account changed hands and the balance dropped to $0, and $8,329.69 was transferred into my new account. That transfer was made up of the money that was already in the account before I contributed my excess contribution, but then it was ‘transferred’ back in because my account changed… Do I need to include those transfers in my calculation of the Adjusted Opening Balance, as it says to include all contributions and transfers?

My brokers said that the market value of my holders transferred out of my old account on 1/27/2022 was $8,049.43. Then the market value of my holdings transferred into my account on 1/28/2022 was $8,329.69. I suppose I would have to add these values in the NIA, because it would be a transfer OUT of my old account ($8,049.43 added into Adjusted Closing Balance) before being transferred INTO my new account ($8,329.69 added into Adjusted Opening Balance). Thoughts?

I now don’t know what to do regarding the fact that at some point in 2021 I had two Roth IRA accounts… one that had $100 dollars contributed (I recieved a 5498 with $100 contributed to that account) and another Roth IRA (I recieved a 5498 with $5800 contributed to that account) – and all of it was in excess. Now, they’re the same account, as it was just transferred from the first account into the second account. Does that change anything with the NIA calculation, if technically in 2021 I had two accounts?

Permalink Submitted by Alan - IRA critic on Fri, 2023-05-26 14:38

If you transferred the account without adding a contribution or taking a distribution, the value only changed due to investment performance. Since the new custodian does not have the prior account records to calculate NIA, this may explain why they asked you to do the calculation. You do not have to make any changes to the calculation, which can be done without regard to the transfer. Use the same opening and closing balances as if the transfer was never made.
While there were actually two Roth accounts in early 2022 at the time of the first excess contribution, and there is no choice now but to have the corrective distribution done from the surviving combined account, just be sure that your adjusted opening balance includes that of both accounts that existed on 1/18/2022. The closing balance will be the actual balance of the now combined account when you do the calculation.
The NIA calculation formula itself is imperfect since it does not reflect the actual time a given amount is in the account. For example, an outside account could be transferred in just a week before the calculation or just a week after the computation starts and it would be treated the same either way. The more contributions or distribution dates there are, the more the final result can be distorted from the actual result. In other cases, an IRA can hold something like real estate that may be actually appraised or valued once every 5 years. The IRS knows this is an imperfect process, and they rarely if ever even look at the result unless it is totally illogical, eg a 90% loss resulting in only 10% of the excess distributed.

Permalink Submitted by ZPeter on Fri, 2023-05-26 14:52

So, basically, continue as before – I don’t need to add the transfers into the new account, or the transfers out of the old account, in the NIA calculation? Even though the formula for the for NIA calls to include transfers in the calculation for the AOB and the ACB?

And, in early January 2022, when the first excess contribution was made, only one account was open. That balance was then transferred into the new account, which was created in late January. So – as stated before, just use the Adjusted Opening Balance as the date prior to the first excess, and I don’t need to worry about anything, or change the NIA in any way, regarding the fact that my Roth IRA changed accounts?

Permalink Submitted by Alan - IRA critic on Fri, 2023-05-26 15:12

The transfers did not involve the addition or subtraction of funds, it was just a move to a newly created empty Roth account. In other words, it was a full transfer of the existing balance to a new account. That said, a 3.5% balance increase in one day is odd, but possible depending on what investments were involved.
Correct. This is where you have the data that the current custodian does not, since the current custodian has only had the account for a short time. If this latest transfer was done closer to the first excess, some custodians would just use their own account data assuming that the first excess contribution was made on the date the new account was opened. However, in your case the former custodian held the funds for the bulk of the computation period. As such they could have either asked you to provide the old account data and did the NIA from that, or asked you to the NIA calc yourself. It’s not clear whether they ask ALL clients to do the NIA calc or only in certain cases such as yours.

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