Excess Roth IRA contribution in 2017

Submitted by Jan Chan on Tue, 2019-02-19 21:50

My situation is:

12/28/2017 I opened up a new Roth IRA account for my son (17-year old) as he had a self-employment income of $3800. I deposited the full amount $3800 (total income shows in 1040 line 22 in 2017 tax return) to this account. Now, 2019, I realized I should have only deposited the ADJUSTED gross income $3600 (1040 line 37). So now I have a $200 excess contribution for 2017.

Can I please ask for help how do I correct this now? What do I have to do exactly before I file 2018 tax? Someone told me to withdraw this $200 now from the broker but I am not sure exactly what needs to be done after I summit the request to withdraw. Is there any form I need to do in 2018 tax filling? Thanks so much!!!!



Submitted by William Tuttle on Tue, 2019-02-19 23:12

  • Neither of the lines you indicated are the proper way to calculate compensation.
  • For a person with only self-employment income, Their compensation is Form 1040 Line 12 – Line 27.
  • If that amount is < $3800, Alan can give the best answer on paying the 2017 excise tax on the excess contribution and how to remove it.


Submitted by Jan Chan on Tue, 2019-02-19 23:25

Sorry let me clearify to be exactly matching of the info on the 1040 I filed as I did not know wage and self employment income might make a difference. So the $3833 total income is the sum of $903 (from W-2) and $2930(from 1099-MISC).  Line 12 is $2930 and line 27 is $207.  Nothing in betwee. So does that mean I should have contributed $3137 For year 2017?  Thanks so much for your respons. 



Submitted by Jan Chan on Tue, 2019-02-19 23:29

oh sorry I should say since there are wages and self-employment, what should the calculation be?? Line 7(wage) plus from line 12-line 27?  Then the total would be $4040??



Submitted by William Tuttle on Tue, 2019-02-19 23:56

$3800 – $3626 = $174 excess Roth contribution. Were there no business expenses on Scedule C?



Submitted by Jan Chan on Wed, 2019-02-20 01:12

No, no business expense on schedule c



Submitted by Alan - IRA critic on Wed, 2019-02-20 00:22

For a 2017 excess Roth contribution of $174, he would owe a 6% excise tax ($10) paid with Form 5329, which can be filed by itself. A 2018 5329 would also be needed, but completing the 2018 form depends on whether he was eligible for a Roth contribution for 2018 that he did not make or whether he took a distribution. The form takes care of this in Part IV. If he did not take any distributions and the 5329 is unable to apply any of his 174 excess amount to 2018, he will owe another excise tax of $10 for 2018. Both forms can be filed together. Now in 2019 to avoid another excise tax he could either apply the excess to 2019 or simply request a distribution of 174 from the Roth. With a 2019 distribution of 174 he would file Form 8606 with his 2019 1040 to report the distribution (no tax due) and also a final 5329 for 2019 showing that the excess amount has been removed. Then no excise tax will be due for 2019.  Therefore, the total cost of this would only be $20 pending on what happened for the 2018 tax year.



Submitted by Jan Chan on Wed, 2019-02-20 02:45

greatly appreciate. So for 2018, he has self employment income of $2400, and $2230 is what I can contribute to this Roth IRA (after the deductible self employment tax).  Do you mean that if he is eligible for Roth IRA and if I have not yet deposit this $2230, I will pay the 6% excise tax for 2018 by using 2018 5329, right?  Or, if I only contribute $2230-$174, do I still need to fill out the 5329 form to pay this 6% since this $174 is not “excess” anymore if I back it out? Maybe I am wrong. 



Submitted by Jan Chan on Wed, 2019-02-20 01:13

so should I first ask the broker for a withdrawal of $174 for 2017 first?



Submitted by Jan Chan on Wed, 2019-02-20 01:15

in 2018, he has $2400 self employment income and should be allowed to contribute $2230. 



Submitted by Alan - IRA critic on Wed, 2019-02-20 02:29

  • The simplest way to resolve this is to determine the allowed Roth contribution for 2018, then make a contribution of 174 less than the allowed contribution ( a contribution of 2056. Form 5329 for 2018 will then apply the 174 excess as a 2018 contribution and treat it as made by the end of 2018. Therefore, there will be no 6% excise tax for 2018  and there is no need to withdraw the 174 and report a distribution on Form 8606. The 2018 5329 should be filed with his 2018 return, while the 2017 5329 should be sent in by itself. 
  • The 2018 5329 should show 174 on line 18; 174 on line 19; line 20 is blank; line 21 is 174; line 22 is 0 and the rest of the lines are blank.


Submitted by Jan Chan on Wed, 2019-02-20 02:56

wow you are so awesom you just read my mind as I was sending out my question!  So in summary:1. No need to ask for a withdrawal from the broker.2. File a 2017 5329 to pay the 6% excise tax, send it out by itself.3. Deposit $2056 as 2018 contribution (which is my allowable amount $2230 – $174)4. File 2018 8606 to report the $174 distribution, correct, even I did not actually withdraw this?? And file this with his 2018 tax return or by itself?5. File 2018 5329 too with 2018 tax return. 



Submitted by Alan - IRA critic on Wed, 2019-02-20 03:37

Not quite. Steps 1-3 and 5 are correct, but no step 4. Since there is no distribution taken out of the Roth IRA, there is no need for Form 8606. Instead of a distribution, the 2018 contribution is just reduced by 174.



Submitted by Jan Chan on Wed, 2019-02-20 04:17

so do you mean I don’t have to file 8606 at all?  So how does IRS knows I offset the excess amount $174 into contribution for 2018?  I want to put an end for the 6% penalty every year so want to make sure



Submitted by Jan Chan on Wed, 2019-02-20 04:24

if I make the withdrawal of $174, then I will need to file 8606, correct?  Since I am not withdrawing $174, then I will only need to use 2018 form 5329 to say I reduce the contribution by $174, therefore, I should not see the 6% penalty on the 2018 5329 anymore.  Am I correct?



Submitted by Jan Chan on Wed, 2019-02-20 04:28

on those step, then do I need to do anything when 2019 comes?  i won’t get 1099-R since I did not make any distribution, correct?  Am I done with everything after completing step 1-3 and 5?



Submitted by Alan - IRA critic on Wed, 2019-02-20 15:23

  • If you eliminate the excess by contributing 174 less, then no withdrawal is needed, no 1099R received, and no 8606 is needed. Therefore, this is the easier solution because it has far fewer steps. Form 5329 tells the IRS that the excess has been applied in 2018 to the space left by contributing 174 less.
  • The excess tax will only be due for 1 year -2017. There is no excise tax due for 2018 because the excess was applied in 2018 by making the reduced contribution. 
  • No other transactions or reporting needed for 2019. The 2018 5329 will complete the process in steps 1-3 and 5.
  • You just need to be sure of the correct 2018 contribution amount and then reduce it by 174.


Submitted by Jan Chan on Wed, 2019-02-20 15:35

let’s say $2000 to be on the safe side?  As long as my additional contribution not exceed $2056 (totals with $174=$2230), i am okay right?



Submitted by Alan - IRA critic on Wed, 2019-02-20 15:56

Yes, that is correct.



Submitted by Jan Chan on Wed, 2019-02-20 17:18

i have the following filled out, correct? Part IVLine 18: 0Line 23: 174Line 24: 174Line 25: $10.44Everything else are blank. Correct? Thanks 



Submitted by Alan - IRA critic on Wed, 2019-02-20 19:13

  • Yes. Do the 2017 5329 first, and this is what you are asking about above.   Lines 18-22 are 0 blank; lines 23 and 24 are 174. Line 25 is either 10 (rounded) or 6% of the year end balance rounded, if less than 10.
  • For 2018 5329 see my post of 2/19.


Submitted by Jan Chan on Wed, 2019-02-20 19:16

stand-alone to the address I filed 1040 last year, right?  



Submitted by Alan - IRA critic on Wed, 2019-02-20 19:26

Yes for 2017 5329.  2018 5329 goes with 2018 return.



Submitted by Jan Chan on Thu, 2019-02-21 02:50

THANK YOU!!



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