Correcting Excess contribution

Hello,

I just realized that I have over-contributed for years 2016, 2017 and was wondering what would be the best approach to rectify that.

Here is a table describing my situation/contributions.

Year –IRA -Roth
2015 0000 1000
2016 5500 5500
2017 5500 5500
2018 0000 0
2019 0000 0

Is it possible to recharacterize/recode the 2016 and 2017 Roth to 2018 and 2019 (subject to income limits). I do understand that I have to pay 6% penalty/fee.

Current value is 5000 on the Roth, if that helps.

Thanks for your input.



  • It is too late to recharacterize contributions prior to 2018 contributions. When the excess is caused by contributing more than a total of 5500 for a year, the Roth contribution is deemed the excess one. Form 5329 is used to report the 6% excise tax and to determine the excess amount for each year. You need to start with the 2016 5329. It will generate an excise tax on 5500 of excess Roth contributions. The 2017 5329 will generate an excise tax on 11000, or on the total Roth IRA value of all your Roth IRA accounts on 12/31/2017 if less than 11,000. You will note that the form will also reduce your excess balance if you took a distribution from the Roth and perhaps you did if the current Roth balance is only 5000 – or maybe it’s 5000 due to investment losses?
  • The 2018 5329 will allow 5500 to be assigned to 2018, but ONLY if you are eligible for a Roth contribution for 2018 (your modified AGI is not too high, but you have earned income). If 5500 can be assigned to 2018, then your excess amount is reduced to 5500 for 2018, and you would owe the 6% on that amount or the 12/31/2018 Roth value, if less. Same for 2019, if you are Roth eligible and do not contribute to any IRA in 2019, the remaining 5500 excess would be assigned to 2019 on a 2019 5329, eliminating the excise tax.
  • Note that this is all done with the various 5329 forms, without contacting your Roth custodian or withdrawing anything from the Roth.  If you are not Roth eligible for 2018 or 2019, then you would need to withdraw the entire remaining balance of the Roth IRA to eliminate the excess amount. You should download a 5329 to see how this works. Ignore anything you read about removing the excess with earnings as that only applies prior to the due date for the return, and it is well past the due dates for 2016 and 2017 returns.
  • You should mail the 2016 and 2017 5329 forms to your IRS filing center. The 2018 form can go with your 2018 return and 2019 with 2019 return. 


  • Thank you for this detailed and quick response. Much appreciated.

  

  • No withdrawals. The balances are due to investment losses.

 

  • How would these affect the calculation?

 

  • Value on 12/31/2016 – 3000

 

  • Contributed 5500 in March 2017  for 2016

 

  • Value on 12/31/2017 –  8,837.50

 

  • Contributed 5500 in March 2018 for 2017

 

  • Value on 12/31/2018 – 4300

 

  • And would someone at Ed Slott LLC be able to help me with this?

 

  • Thanks again.

  



  • If the value of all Roth IRAs on 12/31/2016 was 3000, then the excise tax is 6% of 3000 or $180. Same for 2017 – 6% of 8837.50 even though your excess contributions total 11000.
  • If you were eligible to make a 2018 Roth contribution of 5500 that you did not make, the 2018 5329 will absorb 5500 of your excess amount reducing it to 5500. Enter 5500 on line 19 and 21. Lines 22 and 24 will be 5500. Since the year end value is 4300 (less than 5500), the excise tax is 6% of 4300 on line 25.
  • Likewise, if you are eligible for a Roth contribution that you will not make for 2019, the remaining excess of 5500 will absorb the remaining 5500 excess, eliminating it. There will be no excise tax for 2019, and there is no need to take any distribution from your Roth IRA.
  • Your 12/31/2018 balance indicates that your Roth IRA lost 70% from early 2018 to year end. Be sure this is correct. If so, the losses have reduced your year end balances which will result in the excise tax being lower than otherwise. In addition your contributions are being made after year end for the prior year which also makes the excise tax lower.
  • The IRS may or may not bill you late interest on payment of the 2016 and 2017 excise taxes, so you should get those 2 5329 forms sent in with your check soon. For years after 2017 file the 5329 with your returns for 2018 and 2019. 


Much appreciate the details.



Can the form 5329 for 2016 and 2017  be filed seperately without ameding the tax returns for those years? Please confirm.  Thanks much



Yes, they can be filed separately. but every once in awhile an examiner might request a 1040X. This is fairly rare.



Thanks.



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