Reply To: Fixing excess Roth IRA contribution

Home Fairmark Forum Other Tax Topics Fixing excess Roth IRA contribution Reply To: Fixing excess Roth IRA contribution

Kaye Thomas

As to why you can keep the earnings in the Roth, that’s just the way it works. You need to pull out earnings if you’re avoiding that first year 6% tax. Once you incur that tax, the law no longer requires you to remove earnings to correct the error. Note that although the 6% isn’t based on earnings, in effect it’s a high rate of tax on those earnings unless you had stupendous returns, and is often greater than the amount of those earnings, so a tax of more than 100%.

Because this doesn’t affect anything on your 2020 income tax return, just send in the 5329 with your check for $420. You shouldn’t have to file a 1040X.

Don’t forget, you still have to pull out $7,000 by the end of this year to avoid incurring another $420 penalty.