Alan S. wrote:Vanguard should be able to handle the distribution of your excess contribution. Just tell them the amount of your excess contribution and don't tell them about the Fidelity account remnants. They can calculate the earnings by the difference between the current value of the account and their opening value. For example if your current value is 10% higher than the day of the transfer, they would return $440 to you. The $40 would be taxable and subject to 10% penalty unless you qualify for a penalty exception.
If the VG account dropped, then you get back less than $400 and there will be no tax or penalty.
Alan S. wrote:In your example, there is really no loophole even if Vanguard processes the final corrective distribution as expected. Assume this is your only Roth. Fidelity issues a 5498 for the 5,000 contribution. Vanguard issues a 1099R for the early distriubution of 5,000 and another 1099R for the corrective distribution showing no earnings. These corrective distributions are not reported on Form 8606. When you complete the 8606 with your tax return, you would show not show any regular contributions because the corrective distribution 1099R erased your contribution. Therefore, you have no balance in regular contributions and the early distribution therefore must be earnings. You end up with tax and penalty on the 5,000 anyway.
In the case of an individual who owns multiple IRAs, the net income calculation
is performed only on the IRA designated by the owner as containing the contribution
that is to be distributed as a returned contribution, and that IRA is the IRA that must
distribute the contribution.
If you remove the excess contribution after the applicable correction deadline, the earnings stay in your account and the excess principal is generally subject to a 6% federal penalty tax each year it remains in your account. The penalty tax also applies to the year for which the excess was contributed.
Because earnings stay in the account, Vanguard will not calculate any earnings on the excess.
Vanguard will send you IRS Form 1099-R (for an IRA) or IRS Form 1099-Q (for an ESA) in January of the year after the excess was removed. You may also need to file IRS Form 5329 (or IRS Form 1042S if you are a nonresident alien) to indicate the additional 6% taxes due.
Alan S. wrote:When removing the $400, do not ask for a corrective distribution. Just ask for an early distribution of exactly $400, not mentioning a specific year for the contribution.
3. Information About Your Excess Contribution
■ The deadline has passed for withdrawing excess contributions from my IRA or ESA to
avoid the 6% federal penalty tax.
■ The deadline has not passed.
itworks wrote:Thanks Alan for the very clear explanation. I noticed your advice above is to pay $24 and report it in Form 5329 with 2012 return, and then pay $0 and report it in Form 5329 with 2013 return. Why not simply paying $24 in 2013 and reporting it in 2013 return, if I only need to pay the "penalty for year 2012" in "year 2013"?
And, do you mind explaining why I should not ask for corrective distribution? My guess is that I've already paid the 6% penalty hence there is nothing further to correct. Is that right?
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