Made too much money - excess Roth contribution.

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GG1273
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Made too much money - excess Roth contribution.

Post by GG1273 »

Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
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retired@50
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Re: Made too much money - excess Roth contribution.

Post by retired@50 »

I would suggest you deal with it instead of leaving it alone. This happened to me once a long time ago.

I think the penalty hangs around until you deal with it. Call your custodian and get some help. I think you need to involve the custodian so that any withdrawal is properly coded for the IRS.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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tetractys
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Re: Made too much money - excess Roth contribution.

Post by tetractys »

It’s OK if you don’t need the money. Recharacterize, avoid the penalty, and put your money somewhere else.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

The penalty is not a one time thing. It goes on every year until the excess contribution is fixed in some way.

I think the easiest thing might be to have it re-assigned to a 2024 contribution. You would avoid the penalty and have your 2024 contribution done.

Be careful re-characterizing to tIRA and converting to Roth (backdoor Roth) this near your retirement. We've had a slew of folks make this mistake this year....they used backdoor Roth and then later on rolled their 401k into IRA. This causes pro-rating forever which many people want to avoid.
tibbitts
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Re: Made too much money - excess Roth contribution.

Post by tibbitts »

GG1273 wrote: Mon Apr 01, 2024 9:02 am Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
As I understand it, leaving it alone is not an option.

This contribution was made in calendar year 2023 or 2024?
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GG1273
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Re: Made too much money - excess Roth contribution.

Post by GG1273 »

retiredjg wrote: Mon Apr 01, 2024 10:02 am The penalty is not a one time thing. It goes on every year until the excess contribution is fixed in some way.

I think the easiest thing might be to have it re-assigned to a 2024 contribution. You would avoid the penalty and have your 2024 contribution done.

Be careful re-characterizing to tIRA and converting to Roth (backdoor Roth) this near your retirement. We've had a slew of folks make this mistake this year....they used backdoor Roth and then later on rolled their 401k into IRA. This causes pro-rating forever which many people want to avoid.
Thanks for reminder on the "it never goes away until fixed" issue; did see that on Turbo Tax.
I'm fortunate to have an tIRA with Vanguard (Roth is there too) so can swing it over there. The tIRA was for a payout of a small legacy pension a few years ago and we didn't bother putting anymore money in it. Was going to use for medical insurance premiums but have DW's insurance and Medicare part A for now

I'll have a rollover this year from Fidelity 401k to Fidelity IRA once retirement is complete.
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GG1273
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Re: Made too much money - excess Roth contribution.

Post by GG1273 »

tibbitts wrote: Mon Apr 01, 2024 10:15 am
GG1273 wrote: Mon Apr 01, 2024 9:02 am Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
As I understand it, leaving it alone is not an option.

This contribution was made in calendar year 2023 or 2024?
2023, would pay the penalty as long as situation remained as is on subsequent tax filings. And it is the amount put in + amount "made" on the investment(s)
tibbitts
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Re: Made too much money - excess Roth contribution.

Post by tibbitts »

GG1273 wrote: Mon Apr 01, 2024 10:21 am
tibbitts wrote: Mon Apr 01, 2024 10:15 am
GG1273 wrote: Mon Apr 01, 2024 9:02 am Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
As I understand it, leaving it alone is not an option.

This contribution was made in calendar year 2023 or 2024?
2023, would pay the penalty as long as situation remained as is on subsequent tax filings. And it is the amount put in + amount "made" on the investment(s)
I guess I'm not understanding why you - or anyone - would consider doing anything other than just immediately fixing the problem.
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GG1273
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Re: Made too much money - excess Roth contribution.

Post by GG1273 »

tibbitts wrote: Mon Apr 01, 2024 10:30 am
GG1273 wrote: Mon Apr 01, 2024 10:21 am
tibbitts wrote: Mon Apr 01, 2024 10:15 am
GG1273 wrote: Mon Apr 01, 2024 9:02 am Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
As I understand it, leaving it alone is not an option.

This contribution was made in calendar year 2023 or 2024?
2023, would pay the penalty as long as situation remained as is on subsequent tax filings. And it is the amount put in + amount "made" on the investment(s)
I guess I'm not understanding why you - or anyone - would consider doing anything other than just immediately fixing the problem.
that's why I posted, to get a bit of feedback from others who've experienced it in the past
toddthebod
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

First of all, the problem does go away this year if you don't make additional contributions for 2024. You can absorb the excess into your contribution limit this year, when you will have sufficient compensation due to a few months of work but remain below the MAGI limit.

You have a traditional IRA balance that may make a backdoor Roth unattractive, which rules out recharacterizing the contribution.

Removal of excess contributions brings the associated earnings with it which will be taxable in 2023.

Leaving it alone and absorbing it into your 2024 contribution limit allows you to leave the contribution and associated earnings in your Roth to grow at a cost of 6% of the excess contribution. Last year was really good for equities, like 20%+ returns, so you could be talking removing $1,700 in earnings. Given your tax bracket, the tax cost of those earnings is probably higher than the 6% penalty on the contribution.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

As I understand it, if you file your taxes on time or apply for an extension, you actually have until the October tax day to remove the excess contribution to Roth IRA. After that, you must pay the penalty for the excess contribution. And the penalty continues each year it is not fixed.

I don't think there is any point in waiting though. You may be considering leaving it there til the end of the year, paying the 6% tax and removing the contribution in December but leaving the earnings in the Roth IRA. That could be a small benefit, but it is a lot of squeeze for the juice in my opinion.

I'm not sure you want to roll this contribution into tIRA either. If you already have non-deductible contributions in the tIRA, that would be fine. If not, you'd just be setting yourself up for pro-rating forever...with no particular benefit.

Again, consider having the excess contribution assigned to 2024.
Sax32
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Re: Made too much money - excess Roth contribution.

Post by Sax32 »

I had this very problem with the 2022 taxes. We took out some of our contributions tax free and with the rest we recharacterized 8k into Traditional Roth IRA's. No taxes paid.
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celia
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Re: Made too much money - excess Roth contribution.

Post by celia »

tetractys wrote: Mon Apr 01, 2024 9:43 am It’s OK if you don’t need the money. Recharacterize, avoid the penalty, and put your money somewhere else.
Don't recharacterize if you already have tax-deferred money in any kind of tax-deferred IRA. You can "Remove the Excess Contribution" instead. That is the proper term to use so the custodian can remove everything over the $4,000 that can stay in the Roth. The custodian will also adjust the removed contribution by the amount of growth it earned while in the Roth. That growth will be taxed.

To avoid any penalties, you need to withdraw before you file your taxes and before April 15 (or Oct. 15 if you file an extension). And you need to add a note to the 2023 tax return of how much of your contribution (and growth) were returned to you on (date). This will alert the IRS to look for a 1099-R form next January that will match the numbers you provide now.

Do you now see why you need to clean this up before you file?
tibbitts
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Re: Made too much money - excess Roth contribution.

Post by tibbitts »

GG1273 wrote: Mon Apr 01, 2024 10:44 am
tibbitts wrote: Mon Apr 01, 2024 10:30 am
GG1273 wrote: Mon Apr 01, 2024 10:21 am
tibbitts wrote: Mon Apr 01, 2024 10:15 am
GG1273 wrote: Mon Apr 01, 2024 9:02 am Welp, we made too much money last year and are over the limit on Roth
Fortunately, only $4K will put us under the $228,000 cap. Can take it out or recharacterize it but fortunately, I'm retiring this month and will have much lower income rest of the year. Issue was company paying out stock options right at the end of the year (unexpectedly).
Would also have to recalcualte the amount we "made" on the investment(s)
Penalty is 6%

One thought was to take it out later this year, following my retirement and after 4/15 but haven't found any real reliable source on this scenario. Any sources out there or just do the withdrawl prior to 4/15 and go from there?

Don't need the $ at current time. We do have a refund of about $600 with the penalty if I leave it alone.
As I understand it, leaving it alone is not an option.

This contribution was made in calendar year 2023 or 2024?
2023, would pay the penalty as long as situation remained as is on subsequent tax filings. And it is the amount put in + amount "made" on the investment(s)
I guess I'm not understanding why you - or anyone - would consider doing anything other than just immediately fixing the problem.
that's why I posted, to get a bit of feedback from others who've experienced it in the past
What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
tashnewbie
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Re: Made too much money - excess Roth contribution.

Post by tashnewbie »

retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

tibbitts wrote: Mon Apr 01, 2024 11:02 am What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
This is a good part of what I was considering when I said that I don't think the juice is worth the squeeze. Like you, I prefer to keep things simpler rather than get involved with schemes that can go wrong if I forget or become incapacitated.
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Re: Made too much money - excess Roth contribution.

Post by tibbitts »

tashnewbie wrote: Mon Apr 01, 2024 11:31 am
retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
It's interesting that that's possible for a calendar 2023 contribution.
tashnewbie
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Re: Made too much money - excess Roth contribution.

Post by tashnewbie »

tibbitts wrote: Mon Apr 01, 2024 11:34 am
tashnewbie wrote: Mon Apr 01, 2024 11:31 am
retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
It's interesting that that's possible for a calendar 2023 contribution.
I was wondering if it'd even be possible because of that, but I don't know. I guess maybe the custodian can just shift it to the 2024 year, and it's as if OP didn't make it in 2023...but there are earnings. No clue.
toddthebod
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

tibbitts wrote: Mon Apr 01, 2024 11:02 am What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
If he does not make an a 2024 IRA contribution, the problem goes away when he files a final 5329 with his 2024 tax return. This letter of instruction idea is a bit extreme.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

tashnewbie wrote: Mon Apr 01, 2024 11:31 am
retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
That's what I'm thinking. You can't just take the money out because that would be coded by the custodian as a plain old withdrawal. A person must contact the custodian for removal or for re-characterization. I'm thinking that same phone call is how to get them to reassign it to another year (which would essentially be a removal and re-characterization, seems to me).
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

toddthebod wrote: Mon Apr 01, 2024 11:36 am
tibbitts wrote: Mon Apr 01, 2024 11:02 am What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
If he does not make an a 2024 IRA contribution, the problem goes away when he files a final 5329 with his 2024 tax return. This letter of instruction idea is a bit extreme.
I don't see how the problem just goes away. Are you saying it automatically get's pushed into 2024 if no 2024 contribution is made? I can see some ways that could go wrong.
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

retiredjg wrote: Mon Apr 01, 2024 11:43 am
toddthebod wrote: Mon Apr 01, 2024 11:36 am
tibbitts wrote: Mon Apr 01, 2024 11:02 am What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
If he does not make an a 2024 IRA contribution, the problem goes away when he files a final 5329 with his 2024 tax return. This letter of instruction idea is a bit extreme.
I don't see how the problem just goes away. Are you saying it automatically get's pushed into 2024 if no 2024 contribution is made? I can see some ways that could go wrong.
Yes, he can absorb the excess contributions under his 2024 limit. Given he has a traditional IRA balance and therefore a recharacterization is likely unattractive, he has two options:

1. Return of excess contributions, presumably followed by a new contribution for 2024. Result: Earnings on his 2023 contribution are removed from the Roth IRA, taxed at ordinary income rates, and left to grow in his taxable brokerage.
2. Leave it. Result: He pays 6% of $6,500 (or $7,500) in a one-time penalty. His earnings remain in his Roth IRA growing tax free forever.

If he made his 2023 contribution early in the year and had his account invested heavily in equities, I strongly suspect option 2 is superior.
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GG1273
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Re: Made too much money - excess Roth contribution.

Post by GG1273 »

Super easy to do on line and in house with Vanguard
search for reclassify and the steps w/the form are completed online
tibbitts
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Re: Made too much money - excess Roth contribution.

Post by tibbitts »

toddthebod wrote: Mon Apr 01, 2024 11:36 am
tibbitts wrote: Mon Apr 01, 2024 11:02 am What I would think about is how much effort I'd have to expend to explain this in my letter of instruction (in case of becoming incapacitated or ... dead) vs. whatever the financial/time cost would be to just deal with it now.
If he does not make an a 2024 IRA contribution, the problem goes away when he files a final 5329 with his 2024 tax return. This letter of instruction idea is a bit extreme.
I'm not an expert on this or taxes in general, but if I was filing taxes on behalf of the OP and saw the software flagged an excess contribution (which I assume it would do), I would wonder if I'd done or entered something wrong or missed something. I might even be operating on the assumption that the OP was financially savvy enough to have not made an excess contribution. But if I'd read the strategy he was employing (for me it would be paragraph #35 in my instruction letter - it's not like it would be a separate letter) I'd know what to expect, and avoid wasting time. Excess contributions aren't something most of us deal with every day.
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Re: Made too much money - excess Roth contribution.

Post by celia »

tashnewbie wrote: Mon Apr 01, 2024 11:31 am
retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
That would also require another tax form.

The cleanest thing to do is to request a partial "Removal of Excess Contribution" (and it's gains). That will go to taxable or a check can be sent to you. Then you can make a clean 2024 contribution when you know what your compensation is this year.

Why make it any more complicated than that?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
toddthebod
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

celia wrote: Mon Apr 01, 2024 2:51 pm
tashnewbie wrote: Mon Apr 01, 2024 11:31 am
retiredjg wrote: Mon Apr 01, 2024 10:55 am Again, consider having the excess contribution assigned to 2024.
What would OP need to do to do this? Ask their IRA custodian?
That would also require another tax form.

The cleanest thing to do is to request a partial "Removal of Excess Contribution" (and it's gains). That will go to taxable or a check can be sent to you. Then you can make a clean 2024 contribution when you know what your compensation is this year.

Why make it any more complicated than that?
It's entirely possible the income taxes on the withdrawn earnings will be higher than the 6% penalty on the contribution, plus the earnings then end up in a taxable account instead of a Roth. Filing form 5329 for this year and next is pretty easy.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

If all of this happens on form 5329, how does the custodian know about the change?
toddthebod
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

retiredjg wrote: Mon Apr 01, 2024 3:56 pm If all of this happens on form 5329, how does the custodian know about the change?
They don't, and they don't need to know or care.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

toddthebod wrote: Mon Apr 01, 2024 4:16 pm
retiredjg wrote: Mon Apr 01, 2024 3:56 pm If all of this happens on form 5329, how does the custodian know about the change?
They don't, and they don't need to know or care.
You may be right, but that does not sound right to me. Their records will show a contribution to Roth IRA for a certain year. If the year is changed, I would expect they have to know. Otherwise, their 5498 forms will be wrong.

Why do you think they don't need to know or care to know?
toddthebod
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Re: Made too much money - excess Roth contribution.

Post by toddthebod »

retiredjg wrote: Mon Apr 01, 2024 4:35 pm
toddthebod wrote: Mon Apr 01, 2024 4:16 pm
retiredjg wrote: Mon Apr 01, 2024 3:56 pm If all of this happens on form 5329, how does the custodian know about the change?
They don't, and they don't need to know or care.
You may be right, but that does not sound right to me. Their records will show a contribution to Roth IRA for a certain year. If the year is changed, I would expect they have to know. Otherwise, their 5498 forms will be wrong.

Why do you think they don't need to know or care to know?
That's just how it seems to work.

26 CFR 1.408A-3
Q–7. Does an excise tax apply if an individual exceeds the aggregate regular contribution limits for Roth IRAs?

A–7. Yes. Section 4973 imposes an annual 6-percent excise tax on aggregate amounts contributed to Roth IRAs that exceed the maximum contribution limits described in A–3 of this section. Any contribution that is distributed, together with net income, from a Roth IRA on or before the tax return due date (plus extensions) for the taxable year of the contribution is treated as not contributed. Net income described in the previous sentence is includible in gross income for the taxable year in which the contribution is made. Aggregate excess contributions that are not distributed from a Roth IRA on or before the tax return due date (with extensions) for the taxable year of the contributions are reduced as a deemed Roth IRA contribution for each subsequent taxable year to the extent that the Roth IRA owner does not actually make regular IRA contributions for such years. Section 4973 applies separately to an individual's Roth IRAs and other types of IRAs.
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Re: Made too much money - excess Roth contribution.

Post by Alan S. »

toddthebod wrote: Mon Apr 01, 2024 4:16 pm
retiredjg wrote: Mon Apr 01, 2024 3:56 pm If all of this happens on form 5329, how does the custodian know about the change?
They don't, and they don't need to know or care.
This is correct.
This method of resolving an excess contribution is known as correction by "absorption" and addressed in IRS Reg 1/408A-3, QA #7 as posted by Todd above.

Note that this automatic process (deemed contribution) occurs whether the taxpayer documents it by filing Form 5329 or not, therefore should the IRS discover an excess contribution for many years ago, they should not levy the excise tax beyond the year prior to the year the excess was absorbed. Form 5329 merely documents when the absorption took place and alerts the IRS that there is no longer an outstanding excess contribution balance.

The original 5498 form will be incorrect as to the year of the contribution, which is one of many situations when a 5498 is negated by certain changes such as a corrective distribution, a recharacterization, or a failed conversion.

Note that absorption also applies to TIRA excess contributions, but there are a fewer of them since there is no upper income limit. And TIRA absorptions are more complex because any deduction of the excess is only allowed for the year in which the excess is absorbed.
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retiredjg
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Re: Made too much money - excess Roth contribution.

Post by retiredjg »

Thanks Todd and Alan. My head is not wrapping around this easily...I would probably have to actually "see" it happen to really understand it.
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