Excess contribution Roth IRA - Vanguard process question

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Topic Author
chet96
Posts: 84
Joined: Fri Feb 21, 2020 9:14 am

Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

Folks:

I see a lot of posts about excess Roth IRA contributions, but not much on the actual process with Vanguard.

I'm a bit confused - there is an online form to complete, but to remove the excess contribution, it appears to require that sufficient cash is present in the sweep account to cover both the excess contribution and any gain. If there is not enough to cover both, there is a warning that the transaction will fail.

This requires you liquidate a security. Got that, but how do you know the gain until the security is sold? I liquidated some "slack" over and above the excess contribution, but my concern is that I will undershoot and have to redo it. (17 May deadline and all).

Any suggestions here, or am I missing something? I checked the Vanguard Q&A page, but am even more confused:

How do you calculate excess contribution earnings?
If your excess contribution is removed by your tax filing deadline, plus extensions, the proportional earnings (gains) or losses are also removed. Vanguard has adopted the method set forth in IRS Notice 2000-39 and Proposed Regulations 1.408-11 to calculate these earnings or losses.

The calculations are based on ALL assets in your IRA plan, not just the fund contributed to. For partial excess removals, the latest contribution(s) are removed first and are used in the calculation.

For additional information and examples, read IRS Publication 590-A, Contribution to IRAs External site.
Katietsu
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Re: Excess contribution Roth IRA - Vanguard process question

Post by Katietsu »

File an extension, then you have 5 more months to get it right. You can got to irs.gov and e-file for free. Or make a payment directly with the IRS, select extension, and not even need to do a 4868.

I do not use Vanguard. So I can not answer your original question about the process. I am not sure what about the Q&A is confusing to you.

If you have an IRA with a or existing balance of $5000 in Vanguard Total Stock on March 1. On March 1, you make a $5000 contribution and put it all in a money market.

A year later, the IRA has $7500 in Vanguard Toal Stock and $5025 in the money market. You realize that you were not allowed to make that March 1 contribution that went to the money market. Your associated earnings are not $25 from the money market account. But $1263 which represents 50% of the earnings over that one year time period.
drzzzzz
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Re: Excess contribution Roth IRA - Vanguard process question

Post by drzzzzz »

I did a Roth recharacterization earlier this year since we were not eligible to do a Roth because our income had gone up. What I did was to deliberately put enough into the settlement account to cover the expected amount. To my surprise, the amount Vanguard calculated that I needed was much more than I thought it would be, but luckily I had sold enough of my mutual funds that the money in the settlement account covered it. The selling of the mutual funds in the Roth account is not a taxable event, so it really means u are just out of the market for a few days if you sell too much. I also used the online process that walks you through it very easily (one of the things that worked very smoothly at Vanguard). I had the funds transferred to either my brokerage account or bank account (I think it was the bank account). And they sent the funds by two ACH transactions (the excess that I withdrew and the earnings on it) so it was easy to tell what was taxable (earnings) for 2020. Hope that helps
Alan S.
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Re: Excess contribution Roth IRA - Vanguard process question

Post by Alan S. »

Following is a typical excess contribution removal form. You do not need to know the amount of gain before submitting the form, since the form instructs the custodian to fund the removal by selling the holdings in the order listed. Therefore, if the first holding listed is not enough to fund the cash distribution, the custodian will draw out of the second holding shown, etc.
3. Redemption Information
List the account(s) from which the excess and earnings (if applicable) should be redeemed. If you state a dollar amount and you have checked "Yes" in Section 2, we will also include the calculated earnings on those contributions. If sufficient assets are not available in the fund referenced in 3A, please indicate the next fund(s), in order, from which distributions should be made until the total amount of the excess and earnings have been withdrawn.

Amount $ OR Percentage %
Fund Number Account Number
a) Fund Name

Amount $ OR Percentage %
Fund Number Account Number
b) Fund Name

Amount $ OR Percentage %
Fund Number Account Number
c) Fund Name
Also, note that the gain/loss is calculated by the overall change in the account, not just the change in the holdings you purchased with the contribution.

That said, attempting to determine the % chance in the account value will give you an idea that the cash distribution should amount to, and therefore the taxable amount (earnings). This may also change your strategy, for example if the gain is large enough, you might be better off paying one year of excise taxes, then just withdrawing the excess after the due date, leaving the earnings in the Roth. That distribution would be non taxable, so you would avoid tax and penalty on the earnings.
Topic Author
chet96
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Joined: Fri Feb 21, 2020 9:14 am

Re: Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

Thanks all. I scheduled the sale for Monday. I think I calculated the gain within a few hundred of actual amount.

Hopefully the transfer out can process this week.
x3sphere
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Re: Excess contribution Roth IRA - Vanguard process question

Post by x3sphere »

I just had to do this as well, but my understanding was that you didn't really need to liquidate anything yourself.

The form Vanguard provides instructs you to input the amounts from any securities you want withdrawn. So I added $6000 to VTSAX when I contributed, and on the form I just put to withdraw $6000 from VTSAX - Vanguard says it will calculate the gains attributed to the excess amount. The request hasn't been processed yet, but I didn't see anything that said I had to move funds to the settlement account.

There was a note that said IF I was withdrawing from the settlement account, then I would have to make sure I had enough in there. That's why I just selected the funds I contributed to so I wouldn't have to calculate it myself.
Topic Author
chet96
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Re: Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

x3sphere wrote: Sun May 09, 2021 4:03 pm I just had to do this as well, but my understanding was that you didn't really need to liquidate anything yourself.

The form Vanguard provides instructs you to input the amounts from any securities you want withdrawn. So I added $6000 to VTSAX when I contributed, and on the form I just put to withdraw $6000 from VTSAX - Vanguard says it will calculate the gains attributed to the excess amount. The request hasn't been processed yet, but I didn't see anything that said I had to move funds to the settlement account.

There was a note that said IF I was withdrawing from the settlement account, then I would have to make sure I had enough in there. That's why I just selected the funds I contributed to so I wouldn't have to calculate it myself.
Huh, maybe I better take another look. I read it a couple times, just because it didn't make sense what I was reading. It was an automated, multi-step dialogue, with a bunch of questions, but never allowed me select the security to sell (which seemed odd).

I made it to the step where it asked if I wanted the excess contribution sent via check or electronic transfer and saw the warning.

I was rushing - as of course, my tax person needs the data immediately. (That's a separate issue - I asked him to look into it because Turbotax highlighted it as a problem. He disappeared for months, and I had to chase him this past week. If I have to file an extension, I am finding a new guy).
Topic Author
chet96
Posts: 84
Joined: Fri Feb 21, 2020 9:14 am

Re: Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

x3sphere wrote: Sun May 09, 2021 4:03 pm I just had to do this as well, but my understanding was that you didn't really need to liquidate anything yourself.

The form Vanguard provides instructs you to input the amounts from any securities you want withdrawn. So I added $6000 to VTSAX when I contributed, and on the form I just put to withdraw $6000 from VTSAX - Vanguard says it will calculate the gains attributed to the excess amount. The request hasn't been processed yet, but I didn't see anything that said I had to move funds to the settlement account.

There was a note that said IF I was withdrawing from the settlement account, then I would have to make sure I had enough in there. That's why I just selected the funds I contributed to so I wouldn't have to calculate it myself.
Maybe your account is different - they had to manually calculate my gain, and give the me estimated amount I needed to liquidate to cover any gain. I'm just hoping the sales post in time to make the withdrawal.
Alan S.
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Location: Prescott, AZ

Re: Excess contribution Roth IRA - Vanguard process question

Post by Alan S. »

If you either file your 2020 return by 5/17 OR file an extension by that date, you have until 10/15 (the extended due date) to actually complete the excess removal. This assumes that the excess contribution was made in 2020, not in 2021 FOR 2020.

The problem is that you need to know the amount of gain returned to you to report on this return, so if you do not have that figure an extension is easier than filing your return and then having to amend it on a 1040X.
Topic Author
chet96
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Joined: Fri Feb 21, 2020 9:14 am

Re: Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

Thanks. I submitted the form today - they say it takes a couple business days to process. So I'm cutting it close.
Topic Author
chet96
Posts: 84
Joined: Fri Feb 21, 2020 9:14 am

Re: Excess contribution Roth IRA - Vanguard process question

Post by chet96 »

Update - I'm a little surprised, but they processed the form and scheduled the transfer out within hours.
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