Excess contribution in ROTH IRA
I happen to start a new ROTH IRA account in April 2010 after filing my 2009 returns. As this was before tax filing tax deadline, I contributed towards 2009, I also contributed towards 2010 ROTH IRA in Feb 2011. Previously I have also been contributing a traditional IRA via savings account since last 4-5 years. While filing my taxes this year I found that I exceeded my overall contribution limits for IRAs in both 2009 and 2010. (When I opened the ROTH account I was not aware that IRA limits are applicable to traditional and ROTH combined) I removed the excess contribution of 2010 with almost nil earnings in March 2011, however my 2009 ROTH has ripped some gains($1200-1300). I have also removed excess contribution for 2009 as well. I assume I will be required to pay 6% excise for my excess contribution of 2009. I wanted to know what are my options.
1] Am i required to file 2009 amended return now?
2] what about earnings? Do i need to pay 10% penalty for withdrawals in addition to 6% excise on earnings?
3] can I pay for excise as part of 2010 return or wait until I receive 1099-R from my ROTH custodian? (I assume i will not receive that until Jan-2012)
Will appreciate some kind guidance.
Thank you in advance.
Permalink Submitted by Alan Spross on Sun, 2011-04-10 21:59
Can’t tell for sure, but it sounds like you contributed to both a Roth and a TIRA in 2009. If so, you have incurred a 6% excise tax on the excess amount, which is deemed to apply to the Roth contribution. You can complete a stand alone 5329 for 2009 to pay the 6% tax on the excess, and the same for 2010 unless you have not yet filed for 2010, in which case you can include it with your return.
1) Just file the stand alone 5329 per the above. The IRS will probably bill late pay interest on the amount of the tax.
2) The good news is that when you incur the excise tax, your earnings get to remain in the Roth IRA. You only need to withdraw the amount of the actual excess, which you have apparently done.
3) Pay it with your 2010 return so there will not be any late payment penalty.
If you removed your excess contribution this year, you will need to report it on your 2011 return on Form 8606 and also file a 5329 to show that the excess was corrected. There should be no tax or penalty with the 2011 return.
I made some guesses what you did that may need adjustment. If so, please advise what is different.
Permalink Submitted by Justin Shaw on Mon, 2011-04-11 01:16
Thank you very much. Your response was very helpful.
Your guess is very correct. Because of my lack of knowledge, I actually contributed to both Traditional IRA as well as ROTH IRA in 2009. One thing I missed to mention in my original post was that I already filed my taxes for 2010. Can I file the forms you suggested as part of Amended return or I could not file for penalties until I receive the 1099-R?
Best Regards,
Permalink Submitted by Alan Spross on Mon, 2011-04-11 02:33
You don’t have to wait for the 1099R. But file the two stand alone 5329 forms (2009 and 2010) and pay the 6% penalty to stop the late payment interest from growing. You do not need a full 1040 X amended return form because the rest of your returns for 2009 and 2010 are not affected by the 6% excise tax.
You could have waited to withdraw the $5,000 (if that is the amount of your excess Roth contribution from 2009) until the end of the year. The reason for that is that you would not incur another excise tax charge until 1/1/2012, and since the earnings stay in the Roth you would have several more months for the 5,000 contribution to generate earnings. But it was fortunate that you picked the Roth IRA to remove the excess contribution from instead of the TIRA since the Roth is deemed to be the excess account when you over contribute to both types in total.
Note: You indicated that you removed your 2010 excess contribution made in 2011 already and the earnings were small. Those earnings will be taxable on your 2011 return and subject to 10% penalty. You will receive a 1099R for the corrective distribution and another 1099R for the early withdrawal of 5,000 from your Roth IRA which will be tax free.
Permalink Submitted by Justin Shaw on Mon, 2011-04-11 02:49
Thank you very much for your quick responses and detailed guidance. I will highly recommend your website and services to my friends and colleagues.
Permalink Submitted by Justin Shaw on Mon, 2011-04-11 03:32
One last question. you mentioned I will require to file two standalone 5329 forms (2009 and 2010) that means I will be paying 6% excise on excess contribution of 2009 twice (Once for 2009 and another for 2010 (As I removed the excess in Mar-2011 and failed to remove the excess prior to Dec-2010 despite the fact that I contributed that in April 2010).
To put this in correct perspective, If I have contributed $5000 in excess for 2009 that means I will require to pay $300 for 2009 and $300 for 2010 (Total $600 in penalties) reporting $300 in two different 5329 forms(section 4) and writing a check of $600 to IRS. Am I understanding this correct?
The 2010 Excess was contributed in Feb-2011 and removed in Mar-2011 with $30 in earning, that I will require to report as regular income as well as pay 10% on withdrawal of $30 earnings ($3-$4) and no penalties for removing excess. is that correct?
Best Regards,
Permalink Submitted by Alan Spross on Mon, 2011-04-11 04:23
Correct. Each 5329 builds on the prior one, so do the 2009 edition first, and the excess left from 2009 will carry over to 2010.
Also correct about the 2010 excess.
If your income will remain too high for a 2011 Roth contribution, remember that you can always make a 2011 non deductible TIRA contribution and then do a Roth conversion to get the funds into a Roth IRA. Conversions may be the only way to get funds into a Roth IRA, although if you have a 401k at work, it may offer a Roth 401k option where you can make after tax contributions to the Roth option and/or split your deferrals between the pre tax and the Roth option. Any company match always goes to the pre tax account.
Permalink Submitted by Justin Shaw on Mon, 2011-04-11 04:59
Thank you Alan for your quick responses and thoughtful suggestions.