erroneous Roth contributions
35 yr old client is married filing single for 5 yrs, and has made $3000/yr contributions to his Roth for those 5 yrs. His income has exceeded the $10k income threshold.
what should he do and what are the penalties?
35 yr old client is married filing single for 5 yrs, and has made $3000/yr contributions to his Roth for those 5 yrs. His income has exceeded the $10k income threshold.
what should he do and what are the penalties?
Permalink Submitted by Alan - IRA critic on Mon, 2025-10-13 18:11
The 2025 contribution can be requested to be returned as an excess contribution with allocable gain/loss.
Contributions for year prior to 2025 can be withdrawn as a normal distribution to remove those excess contributions. This distribution will be non taxable, but Form 5329 with Form 1040X needs to be filed for each year and the 6% excise tax paid on the accumulated excess amount each year. For example, 2021 6% of 3000, 2022 6% of 6,000, 2023 6% of 9000, 2024 6% of 12,000. A final 2025 5329 will have to be filed showing that the 12,000 excess has been withdrawn, and there will be no excise tax for 2025. Finally, a 2025 8606 will be needed to report the 12,000 distribution for ordinary tax purposes, but it should be tax free, coming from the regular Roth IRA contribution balance.
Of course, if a 2025 contribution was not made, the above years would be earlier than in the example.
If a 2025 contribution was made, rather than returning it with gain or loss, it could instead be recharacterized as a TIRA contribution, or taxpayer could file jointly. Taxpayer could also amend recent earlier returns to joint as well and that would eliminate the excess contributions retroactively, but might have other consequences or he would have been filing jointly all along.