How Do I Handle My Excess Roth IRA Contributions?

This week’s Slott Report Mailbag examines excess Roth IRA contributions and clarifies the two-year rule on an IRA rollover to a SIMPLE IRA. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

I made two contributions to my Roth IRA by accident. I made the contributions in April of 2015. I made one for 2014 and one for 2015. The one designated for 2014 turned out to be an extra contribution since I had made one the year prior. I’m now over 59 ½. I contacted my brokerage firm to see about taking out the extra contribution. Since I am removing the contribution after my tax filing deadline, they tell me I need to process it as a normal distribution instead of a return of excess. I don’t feel this is the correct thing to do since I have had growth in the account since April of 2015. I’m afraid that if I do this, the IRS could still come back and consider me to still have the extra contribution in the account and incur further penalties.  

How should I get this issue resolved correctly?  Thanks.

Brannon

Answer:
Brannon,

The custodian is actually correct. Since the excess contribution was made for 2014, the deadline to distribute it without a penalty was October 15, 2015. Since the contribution wasn’t removed by then, you must report a 6% penalty on a 2014 Form 5329 on the excess amount. It wasn’t distributed by the end of 2015 either, so you’ll need to file a Form 5329 to report the penalty for 2015 as well.

If you haven’t made a contribution for 2016 yet, but are able to do so, you actually don’t need to take a distribution at this point. The extra contribution you made for 2014 will automatically be counted towards your contribution for 2016 (this would have happened for 2015 had you not made a separate contribution). If you did make a contribution for 2016 already, then you’ll need to distribute the excess amount as the custodian indicated. Since you owe the 6% penalty for 2014, no gains/losses attributable to that contribution need to be removed. It sounds weird, but that is the rule!

2.

I am a long time subscriber to the newsletter. I know the new PATH Act allows a IRA rollover to a SIMPLE IRA. I know there is a two-year rule. What is it that has to be measured by this two-year rule?

Thanks!

Answer:
Thanks for subscribing. We appreciate your readership! The two-year “holding period” begins when a person’s SIMPLE IRA is credited with the first SIMPLE IRA contribution. This is true regardless of whether the initial SIMPLE IRA contribution is an employee or employer contribution.

Receive Ed Slott and Company Articles Straight to Your Inbox!
Enter your email address:

Delivered by FeedBurner

 

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.