Roth overcontribution

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AnyError
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Roth overcontribution

Post by AnyError » Sun Apr 15, 2018 2:59 pm

Hello,

I am just getting ready to submit my taxes and realized that I contributed $16,500 to my Roth in the 2016 year ($5,500 was intended to go towards 2017). I was able to have $5,500 switched to 2017 but still have a $5,500 overcontribution that was withdrawn. From my understanding, I need to amend the 2016 return to include Form 5329 (6% excise) and also include the 5329 this year. Additionally, it seems that I must also pay a 10% withdrawal penalty on the $5,500?

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Pajamas
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Re: Roth overcontribution

Post by Pajamas » Sun Apr 15, 2018 3:20 pm

Can't you apply the excess contribution to 2018 instead of withdrawing it?

AnyError
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Re: Roth overcontribution

Post by AnyError » Sun Apr 15, 2018 3:52 pm

My account is through TIAA. They weren't too helpful with the whole process and never offered this (check is currently being sent to me). Could this be done to avoid the 10% penalty?

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Pajamas
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Re: Roth overcontribution

Post by Pajamas » Sun Apr 15, 2018 4:32 pm

Maybe if you send the check back they could void the transaction. I would definitely ask.

My experience is that account custodians don't generally offer suggestions or advice about taxes and similar unless you are paying an advisor for it.

aristotelian
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Re: Roth overcontribution

Post by aristotelian » Sun Apr 15, 2018 5:01 pm

It's not an early withdrawal, it's a withdrawal of an excess contribution. I don't think you owe the 10%. If you corrected all your overcontributions and then withdrew your legitimate contributions, you would then owe the 10% penalty, but that is not the case here.

Did you also withdraw the gains (if any) while the funds were in the account? (Edit: I believe you are allowed to keep any gains as long as you pay the excise tax for every year the overcontribution is not corrected).

Looking at Part IV of Form 5329, it looks to me that you only owe the 6% tax. However, if it was not corrected until this year, you owe the 6% tax for both 2016 and 2017. If you have already filed for 2017, you will need to do 5329 and 1040X for that year as well.

Now that you have withdrawn the contribution, you can now make a contribution for 2018 with no penalty (as Pajamas said, it would have been easier to just leave the money in there, but withdrawing the overcontribution and then contributing for 2018 has the same net effect).

AnyError
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Joined: Sun Apr 15, 2018 2:52 pm

Re: Roth overcontribution

Post by AnyError » Sun Apr 15, 2018 5:23 pm

Thanks for the replies.

I will ask to have the check voided as I agree it would most straightforward to use this as a 2018 contribution. I have spent quite a bit of time reading about this issue and multiple websites suggest that the 10% penalty is imposed for any contribution removed after October 15th of the filing year (doesn't make sense to me why an additional penalty is charged to fix an overcontribution).

Edit: I did remove the gains but they were very small.

Alan S.
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Re: Roth overcontribution

Post by Alan S. » Sun Apr 15, 2018 10:48 pm

AnyError wrote:
Sun Apr 15, 2018 2:59 pm
Hello,

I am just getting ready to submit my taxes and realized that I contributed $16,500 to my Roth in the 2016 year ($5,500 was intended to go towards 2017). I was able to have $5,500 switched to 2017 but still have a $5,500 overcontribution that was withdrawn. From my understanding, I need to amend the 2016 return to include Form 5329 (6% excise) and also include the 5329 this year. Additionally, it seems that I must also pay a 10% withdrawal penalty on the $5,500?
You actually contributed 16,500 in 2016? That seems odd. The only way you could apply 5500 of that excess to 2017 would be from filing Form 5329 for 2017, and you had to be eligible for a Roth contribution in 2017 that you did not make. The entire process looks like this:

1) 16,500 contributed in 2016 for 2016. You owe the 6% excise tax on 11,000 of it on a 2016 5329.
2) You then apply 5500 of the excess to your 2017 Roth contribution (if eligible) and file a 2017 5329 and pay 6% of 5500.
3) Now it's 2018 and you apparently took a distribution of 5500 that will eliminate your excess contribution in 2018. The custodian is unlikely to agree to void the check. The distribution of 5500 should be non taxable as it is a return likely funded by your balance of regular contributions. That leaves you open to make a new 5500 regular contribution for 2018 if eligible. If you had not taken the distribution and applied the 5500 excess balance on 12/31/2017 as your 2018 contribution, that also would have eliminated your remaining excess. Therefore, there is really no benefit to asking to have the check voided, and no drawback if they refuse other than having to file Form 8606 to report a nontaxable distribution. Either way, you will file a final 5329 for 2018 to show that your excess was eliminated, and no excise tax will be due for 2018.

There is no 10% penalty here since none of your distribution was taxable, and even if you received somewhat more than 5500 you should have enough in regular Roth contributions to cover it.

So looking at 660 in excise taxes for 2016 5329, and 330 for 2017 5329. The IRS may bill some late interest for the 2016 5329 in addition.
Any questions, please advise.

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