March 22, 2019 at 11:08 pm #3118
A couple in their mid 60s in 2016 both made max Roth contributions that year, but just learned from their custodian that their MAGI was above the contribution limit for that year only. They have made max contributions for 2017 and 2018.
In looking through the form 5329 it looks like the excess contribution for 2016 is carried forward and subject to the 6% tax each year for 2017 and 2018 because the excess was not withdrawn by Oct 15 of each of those years. So does this mean completing a 2017 5329 and a 2018 5329 for each RIRA excess (i.e. a total of 4) with the penalty calculated on each?
Question 2: can this excess be designated for 2019, assuming they have sufficient earned income and otherwise qualify to contribution? If they had not yet made their 2018 contribution, could the excess be designated for 2018 or must that designation of the past excess contribution be done by 12/31/2018?
BruceMMarch 23, 2019 at 12:52 am #3120
Bruce, not sure how their custodian would know what their MAGI is, but the 2016 excess would be subject to the 6% excise tax on a 2016, 2017 and 2018 5329 for each spouse (3 years for each spouse). Apparently, no distributions have been made during this entire period.
One option they have is to request a return of their 2018 contributions with earnings. This action creates unused space for the excess amount at the end of 2017 to be assigned on Form 5329 for 2018 as a 2018 contribution. That will eliminate the 2018 excise taxes. Any earnings on the removal of 2018 contributions are taxable in the year in which the 2018 contribution was actually made. That would mean an amended 2018 return if they have already filed. Total excise taxes would be 4.
Q 2 – Instead of the above, if eligible for 2019, they could end the excess amount by not making a 2019 contribution (except for the amount of the 2019 contribution limit increase) and Form 5329 for 2019 would then assign the excess to 2019. They never have to touch their Roths or contact their custodian, but would still incur 6 excise taxes through 2018.
But if the 2018 contributions have not yet been made, they would not need to be removed and if eligible the 2017 excess would be assigned to 2018 on a 2018 5329. Total excise taxes now 4 instead of 6. 5329 forms only needed for 2016-2018.
With all of these options, they end up losing Roth space for 1 year during the period 2016-2019. 4 years, but 3 contributions allowed.
The IRS may or may not bill late interest for late payment of the 2016 and 2017 excise taxes.March 23, 2019 at 1:54 am #3121
I believe they have made a 2018 contribution. But I hadn’t thought about withdrawing that plus earnings thus creating space for the excess carry forward. I just wasn’t sure if the excess had to be designated for the year by 12/31 rather then 4/15 of the next year
BruceMMarch 23, 2019 at 6:38 pm #3127
Bruce, I wasn’t sure exactly what you meant by that question. Form 5329 deals with all the aspects of excess contributions from determining the balance of the excess to determining the 6% excise tax for each year.
It also reports the two common automatic corrective mechanisms for excess contributions:
1) Removal of the excess after the due date
2) Applying the excess as a current year contribution.
Either of the above will retire the excess amount (or a portion of it). Since there is no statute of limitations for excess contribution, the 5329 can be filed anytime. Since excess amounts can be cumulative, the 5329 should be filed for the first year of an excess that is not removed by the due date, and any excess not corrected by one of the two methods incurs the excise tax for the current year. While a distribution must be done by 12/31 of the current year, applying to space available is automatic so a 5329 can be filed years later or amended. Therefore there is no time limit for filing a 5329 to retire an excess amount by applying it to the specific year.March 23, 2019 at 7:08 pm #3128
Yes, I see.
Another option not mentioned, assuming this excess Roth contribution is excess due to MAGI, is to recharacterize it to a TIRA if done by filing date plus extensions. But in this case it does not apply as they are past Oct 15, 2017.
This has got me thinking….. (yes, always dangerous)
Assuming the IRA custodian allowed it or somehow didn’t catch it, what would happen if some high AGI person (too high to contribute to a Roth) contributed $100,000 to their Roth, invested aggressively and then filed the 5329, paid the $6,000 penalty after the next year’s Oct 15 and just did this year after year, and then finally at some future year withdrew the original $100,000 excess, leaving tens if not hundreds of $Thousands in the Roth?
BruceMMarch 23, 2019 at 8:18 pm #3129
Gain or loss on an excess contribution is a major factor in deciding how to deal with an excess contribution. With a large enough gain, there is an advantage to not have the excess returned with earnings by the extended due date. Compare the 6% excise tax to the ordinary tax on the earnings and possibly penalty to determine what is less. Then either apply the excess to the next year’s contribution or distribute it before year end to avoid a second year of excise taxes.
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