Roth IRA Conversion Taxes, Excess IRA Contribution Questions Highlight Mailbag

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

This week’s Slott Report Mailbag includes some detailed questions (retirement planning is complicated, you know!) on Roth IRA conversion taxes, excess IRA contributions and the process of combining Roth IRA accounts. We hope you enjoy these Thursday mailbags, and make sure to send your question to [email protected]As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Hello Mr. Slott,

I just withdrew $26K from a Roth IRA annuity that was opened in 2010. I have pre-paid the principal taxes for the Roth conversion (original conversion of $45K). Because this withdrawal is less than 5 years, I will need to pay tax on this gain. The annuity company says the tax is undetermined because it is a Roth. Do I determine the gain based upon my original conversion basis and try to discover the gain on that basis before the withdrawal? Shouldn’t the annuity company be able to provide me this amount of gain?
Thank you,

Jeff L. Moore

The annuity company cannot provide you with that information because if you have other Roth IRAs, they must be included as well to determine the taxes due, if any. You or your CPA must calculate any taxes or penalties due. Under the ordering rules for Roth IRAs (where all Roth accounts are treated as if they were one Roth IRA), contributions are distributed first, tax free and penalty free. Next, conversions are distributed tax free because you’ve already paid taxes on that amount. However, if you are under age 59-1/2 and it’s been five years or less since the original $45K conversion, then you’ll owe a 10% penalty for removing conversion funds too soon (unless an exception to the penalty applies). IRS Form 8606 will walk you through the steps on whether or not this distribution is subject to any taxes or penalties.


Here is my situation:

Anne and I have always filed a joint tax return. The excess contributions to our IRAs were caused by incorrectly including deferred compensation with self-employed income for calculating the maximum IRA contribution. All contributions were from after-tax funds. All accounts are held at the same financial institution.

For the 2009 tax year, on 4/13/2010, I made a $6000 after-tax contribution to my Roth IRA and $6000 to Anne’s Roth IRA. Our MAGI was $142K. After removing the deferred compensation from the calculation our total compensation for the tax year 2009 was $2320. The excess contributions were thus a total of $9680. In the tax year 2010, we had no compensation usable for IRA contributions and in 2011 our MAGI was too high for a Roth IRA contribution. It is likely that our MAGI will be too high for a Roth IRA contribution in 2012.

My proposed solution:

I will divide the $9680 excess contribution as follows: $5000 to Anne’s Roth IRA and $4680 to my Roth IRA). This will ensure that some contribution was made to her Roth in 2009 beginning the 5-year period.

First, prepare two Forms 5329 for 2009 for Anne and I entering $5000 and $4680 on line 23 and 24. I will calculate the 6% tax on line 25 for both forms ($300 and $280.80, respectively). No earnings need be considered. Second, prepare two Forms 5329 for 2010 for Anne and myself entering $5000 and $4680 on lines 18 and lines 24 and calculating the same 6% taxes on lines 25. Again, no earnings need be considered. Third, prepare two Forms 5329 for 2011 in the same way. The total tax will be: $1742.40. Submit a check and the six forms to the IRS. They will probably charge me interest on the back taxes, so I should file the forms and pay the taxes as soon as possible. Lastly, before the end of 2012 (say October) have my financial institution send us $5000 and $4680 from the two Roth accounts. This is not a recharacterization, but a simple distribution. No earnings need be removed. No 6% tax will need to be paid in 2012. No amended 1040 will need to be filed.

My questions: can you comment on whether this is correct? Should I enclose a letter to the IRS explaining what I have done?


Ernest – It looks as though you have a good grasp on your excess contributions and the penalties involved (I have not checked your math). Generally you must notify the custodian that your distribution is a return of an excess contribution. This allows them to use the appropriate codes on Form 1099-R. However, since you are correcting your excess contributions after the applicable deadline, there is no code for a return of an excess contribution. You will want to retain the backup for your calculations in case of any follow-up by IRS.


At one of my banks, I have 2 Roth IRA CD’s. One is a conversion and the other was set up as a Roth from the beginning. My bank told me I am not allowed to combine these two. My other bank allowed me to do this about one year ago.

I found something online that I think allows me to do this, and it is something called technical corrections to the Internal Revenue Service Restructuring and Reform Act of 1998. Do you know if I have to keep these accounts separate?

Sue Gerber

Your Roth IRAs can be combined. In fact, when figuring out whether or not a Roth IRA distribution is taxable, the law combines them all and looks at it as one Roth IRA. Originally, Roth conversion funds had to be kept separate, but that rule changed many years ago. You may want to transfer those two Roth IRAs to a more enlightened financial organization or financial adviser.


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