How Do I Handle My Excess Roth IRA Contributions? | Ed Slott and Company, LLC

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.

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