Income tax on excess roth ira contributions/earnings
Reposting this as I think my original post did not go through. I have a client that made excess Roth ira contributions for years. We are currently quantifying the 6% excise tax exposure. The client closed the Roth ira account last year which consisted entirely of excess contributions and earnings thereon. As expected, we received the Form 1099-R. It appears based on IRC 408A and 408(d) that the distribution that closed what I will call the “bad” Roth IRA is treated as any other ordinary distribution, meaning if it otherwise meets the definition of a “qualified distribution” the entire amount of the distribution (including the earnings generated from the excess contributions) is tax free, and thus not reportable on Form 8606. This result would seem to be the same if instead, the client only withdrew the excess contributions from the ira, and kept the earnings in the Roth ira, presumably to be withdrawn tax free at some point in the future. Any comments would be appreciated. Thanks, Jim.
Permalink Submitted by Alan - IRA critic on Mon, 2024-02-05 16:16
Permalink Submitted by Jim Usseglio on Mon, 2024-02-05 17:57
Thanks Alan. What is the authority that an excess contribution to a Roth ira does not start the 5 year tolling? And why report the total distribution on Form 8606 if it is a qualified distribution? Thank you, Jim