Account for slight Roth over-contribution

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Topic Author
dannyboy
Posts: 82
Joined: Tue May 17, 2016 10:51 pm

Account for slight Roth over-contribution

Post by dannyboy »

Howdy BH!

Quick question about a minor Roth over-contribution. Here's the background: at my current job, I only have access to a tax-deferred 403(b). Since I am a young student with relatively low income, I have been trying to prioritize filling Roth space (beyond my Roth IRA). Because I technically qualify as having been "affected" by CoVID, I have followed this CARES Act-enabled approach since August: every paycheck, I contribute a set amount to my 403(b). Immediately, I request a CARES Act distribution for that entire amount. Directly after I submit that request, well before the custodian has processed it, I "repay" that exact amount into my Roth IRA as a "plan rollover," as permitted by the CARES Act (repayments are allowed into eligible retirement plans). About ten days later, I receive a check for the full amount from my 403(b) custodian, and the transaction is complete. I do not withhold taxes but I expect to pay them, albeit at a low marginal rate. I spent a lot of time devising this methodology to get money into my Roth as efficiently as possible, and a couple posters here backed this up as a viable solution.

My question is: in some cases, I contributed, say, $1k from my paycheck, then immediately added $1k to my Roth, but by the time my CARES Act distribution processed the market dropped and I only received $985 in my withdrawal. This means that, for that particular paycheck, I over-contributed by $15. Over the course of the past five months, I have over-contributed by about $45 net. So, how do I account for this? Is it enough to just withdraw $45 from my Roth? Or do I have to explicitly tell Vanguard that I'm withdrawing principal? It's a very small amount of money so I'm not worried about dollar amounts of fines or anything, I just want it to be done right so I don't have to worry about it.

I should also mention that, due to the CARES Act provisions expiring in 2021, I will no longer be using this technique (instead I will just roll this year's contributions into a Roth all at once in May when my employment expires), so I won't need to deal with any more of this in the future. Thanks!

Danny
Topic Author
dannyboy
Posts: 82
Joined: Tue May 17, 2016 10:51 pm

Re: Account for slight Roth over-contribution

Post by dannyboy »

bump!
aristotelian
Posts: 8644
Joined: Wed Jan 11, 2017 8:05 pm

Re: Account for slight Roth over-contribution

Post by aristotelian »

May I ask why you didn't just stop contributing to your 403b and contribute directly to your Roth IRA? My head hurt reading this. Since this is the first year for the CARES Act I don't think anyone is going to be able to help you, especially with an unusual scenario like yours. Have you called your custodian to see what they advise?

In general with Roth overcontributions you either need to withdraw it (plus gains) or pay a 6% excise tax which goes away if you undercontribute by the same amount next year. I can't say whether that will work in this case or how to report it.
Topic Author
dannyboy
Posts: 82
Joined: Tue May 17, 2016 10:51 pm

Re: Account for slight Roth over-contribution

Post by dannyboy »

aristotelian wrote: Tue Jan 12, 2021 11:00 pm May I ask why you didn't just stop contributing to your 403b and contribute directly to your Roth IRA? My head hurt reading this. Since this is the first year for the CARES Act I don't think anyone is going to be able to help you, especially with an unusual scenario like yours. Have you called your custodian to see what they advise?

In general with Roth overcontributions you either need to withdraw it (plus gains) or pay a 6% excise tax which goes away if you undercontribute by the same amount next year. I can't say whether that will work in this case or how to report it.
Thanks for responding! I had already filled my Roth IRA for the year and I was looking for a hacky way to backdoor Roth. My employer doesn't offer an after-tax or Roth retirement account, so this was my only option, and since I'm so young I valued the Roth space way more than I valued simplicity.

Abstracting away the fact that this had to do with the CARES Act, I think I can treat the problem as follows: I rolled over, say, $1,000 from my tax-deferred 403(b) to my Roth IRA, but $1,005 ended up in my Roth. In this case, it sounds like I need to withdraw $5 plus the gains from $5. Any idea how to calculate those gains? I have kept track of every over-contribution and the date on which it occurred, if that matters.

I haven't called my custodian, but in the past it has taken them months to respond to a single question so I thought I'd start here. thanks again!
aristotelian
Posts: 8644
Joined: Wed Jan 11, 2017 8:05 pm

Re: Account for slight Roth over-contribution

Post by aristotelian »

dannyboy wrote: Tue Jan 12, 2021 11:11 pm
aristotelian wrote: Tue Jan 12, 2021 11:00 pm May I ask why you didn't just stop contributing to your 403b and contribute directly to your Roth IRA? My head hurt reading this. Since this is the first year for the CARES Act I don't think anyone is going to be able to help you, especially with an unusual scenario like yours. Have you called your custodian to see what they advise?

In general with Roth overcontributions you either need to withdraw it (plus gains) or pay a 6% excise tax which goes away if you undercontribute by the same amount next year. I can't say whether that will work in this case or how to report it.
Thanks for responding! I had already filled my Roth IRA for the year and I was looking for a hacky way to backdoor Roth. My employer doesn't offer an after-tax or Roth retirement account, so this was my only option, and since I'm so young I valued the Roth space way more than I valued simplicity.

Abstracting away the fact that this had to do with the CARES Act, I think I can treat the problem as follows: I rolled over, say, $1,000 from my tax-deferred 403(b) to my Roth IRA, but $1,005 ended up in my Roth. In this case, it sounds like I need to withdraw $5 plus the gains from $5. Any idea how to calculate those gains? I have kept track of every over-contribution and the date on which it occurred, if that matters.

I haven't called my custodian, but in the past it has taken them months to respond to a single question so I thought I'd start here. thanks again!
Usually they calculate the gains for you so again you should call them.
Topic Author
dannyboy
Posts: 82
Joined: Tue May 17, 2016 10:51 pm

Re: Account for slight Roth over-contribution

Post by dannyboy »

aristotelian wrote: Tue Jan 12, 2021 11:15 pm
dannyboy wrote: Tue Jan 12, 2021 11:11 pm
aristotelian wrote: Tue Jan 12, 2021 11:00 pm May I ask why you didn't just stop contributing to your 403b and contribute directly to your Roth IRA? My head hurt reading this. Since this is the first year for the CARES Act I don't think anyone is going to be able to help you, especially with an unusual scenario like yours. Have you called your custodian to see what they advise?

In general with Roth overcontributions you either need to withdraw it (plus gains) or pay a 6% excise tax which goes away if you undercontribute by the same amount next year. I can't say whether that will work in this case or how to report it.
Thanks for responding! I had already filled my Roth IRA for the year and I was looking for a hacky way to backdoor Roth. My employer doesn't offer an after-tax or Roth retirement account, so this was my only option, and since I'm so young I valued the Roth space way more than I valued simplicity.

Abstracting away the fact that this had to do with the CARES Act, I think I can treat the problem as follows: I rolled over, say, $1,000 from my tax-deferred 403(b) to my Roth IRA, but $1,005 ended up in my Roth. In this case, it sounds like I need to withdraw $5 plus the gains from $5. Any idea how to calculate those gains? I have kept track of every over-contribution and the date on which it occurred, if that matters.

I haven't called my custodian, but in the past it has taken them months to respond to a single question so I thought I'd start here. thanks again!
Usually they calculate the gains for you so again you should call them.
Okie doke. Thanks again for the response.
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