Excess ROTH Contribution
Found a client who made an excess contribution to a ROTH IRA in 2022 per an old accountant’s direction. They filed 2022 taxes on 10/15/2023. A new accountant just uncovered this error. Clearly the entire $6000 will need to be sent back to the client. For taxation purposes we are being told three different things from CPA and our investment service department:
1)We need to send the $6000 back to the client, determine the gains and return those as well. Then the client will be assessed a tax on the gains that were realized.
2) We send back the $6000 and the client pays a 6% excise on the contribution and we send back gains which will be taxed at ordinary income tax rates
3) We only send back the $6000 and they pay the excise tax on the contribution.
Concerned none of these are correct and looking for an answer.
Permalink Submitted by Alan - IRA critic on Wed, 2024-10-09 17:35
Gain or loss does not apply for corrections after the due date. The due date passed a year ago.
Same as above. The 6000 excess must either be withdrawn before year end or it should be determined if client possibly qualified for a Roth contribution for 2023 but did not make a TIRA or Roth contribution. In that case the excess would be applied to 2023 and only one year of excise taxes would be due (for 2022)
This is most likely the case, but the same option applies for 2024 as for 2023. If client qualifies for a 2024 Roth contribution that was not made, the excess would automatically be applied as a 2024 contribution on Form 5329. The excise tax for 2022 and 2023 would be due.
While absorbing the excess produces the best solution, the client more likely continued to not qualify for a Roth contribution. In that case your Option 3 would apply.
If Option 3 applies, a distribution of 6000 is requested with no mention of an excess contribution. The distribution will produce a 1099R, but it would be non taxable because it is coming from the balance of regular Roth contributions. A 2022 and 2023 5329 would need to be filed with 1040X to pay the 6% excise tax. The 2024 return would report the distribution on Form 8606 (non taxable), and a final 5329 would be needed to show that the distribution eliminated the excess in 2024. No 2024 excise tax would be owed.