Excess contribution to Roth IRA

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Topic Author
openmind
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Joined: Mon Jul 08, 2019 1:14 pm

Excess contribution to Roth IRA

Post by openmind » Thu Feb 13, 2020 12:51 pm

I invested about 6000 earlier this year into my Roth IRA account. While doing my taxes yesterday I found some stock sales I had forgotten about. Now it looks like I have contributed 3840 in excess to my account. The problem is the 6k has appreciated to 7800. Can I just sell 3840 worth of stock and withdraw that? How do I calculate the correct withdrawal amount .

TropikThunder
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Joined: Sun Apr 03, 2016 5:41 pm

Re: Excess contribution to Roth IRA

Post by TropikThunder » Thu Feb 13, 2020 12:57 pm

openmind wrote:
Thu Feb 13, 2020 12:51 pm
I invested about 6000 earlier this year into my Roth IRA account. While doing my taxes yesterday I found some stock sales I had forgotten about. Now it looks like I have contributed 3840 in excess to my account. The problem is the 6k has appreciated to 7800. Can I just sell 3840 worth of stock and withdraw that? How do I calculate the correct withdrawal amount .
By earlier this year do you mean in January 2020 for your 2019 IRA? If so, then yes the excess needs to be removed but there’s no penalty if you do it by tax filing day. You can’t remove just contributions and leave the earnings, but you don’t need to calculate it. Submit the excess contribution form indicating the year and amount of overage and the brokerage calculates the earnings and reports it on a 1099-R. The contribution won’t be taxable (you never deducted it) but the earnings will be taxable as regular income.

Topic Author
openmind
Posts: 13
Joined: Mon Jul 08, 2019 1:14 pm

Re: Excess contribution to Roth IRA

Post by openmind » Thu Feb 13, 2020 1:00 pm

Yes, I purchased it in Jan-20. Thanks I will search for the form and will submit to Vanguard

MotoTrojan
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Re: Excess contribution to Roth IRA

Post by MotoTrojan » Thu Feb 13, 2020 1:04 pm

If you believe you'll be eligible for a 2020 Roth contribution the other option is to roll the excess contribution amount in to 2020. You'll pay a 6% fee on the excess 2019 amount, but won't have to remove the contribution/gains or pay taxes on the gain. Depending on your overall tax situation this may be the lowest cost option. Also doesn't require doing anything more with the brokerage, just under-contribute to your 2020 Roth by the amount of the excess contribution.

Alan S.
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Location: Prescott, AZ

Re: Excess contribution to Roth IRA

Post by Alan S. » Thu Feb 13, 2020 1:12 pm

MotoTrojan wrote:
Thu Feb 13, 2020 1:04 pm
If you believe you'll be eligible for a 2020 Roth contribution the other option is to roll the excess contribution amount in to 2020. You'll pay a 6% fee on the excess 2019 amount, but won't have to remove the contribution/gains or pay taxes on the gain. Depending on your overall tax situation this may be the lowest cost option. Also doesn't require doing anything more with the brokerage, just under-contribute to your 2020 Roth by the amount of the excess contribution.
A related option to the above if you also expect to over the income limit in 2020 is to pay the 6% excise tax, and just remove the 3840 late in the year. Removal will be tax free but reported on Form 8606. The earnings remain in the Roth, and this avoids tax and penalty on the earnings if you withdrew the excess and earnings. That tax and penalty would apply to 2020 if that is when you made the excess contribution for 2019.

But you cannot make the best decision without being sure of your earnings estimate of 1800. A 30% gain on a contribution you just made is unlikely. How did you come up with that 7800 figure?

Topic Author
openmind
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Joined: Mon Jul 08, 2019 1:14 pm

Re: Excess contribution to Roth IRA

Post by openmind » Thu Feb 13, 2020 1:25 pm

MotoTrojan wrote:
Thu Feb 13, 2020 1:04 pm
If you believe you'll be eligible for a 2020 Roth contribution the other option is to roll the excess contribution amount in to 2020. You'll pay a 6% fee on the excess 2019 amount, but won't have to remove the contribution/gains or pay taxes on the gain. Depending on your overall tax situation this may be the lowest cost option. Also doesn't require doing anything more with the brokerage, just under-contribute to your 2020 Roth by the amount of the excess contribution.
I don't think I will be eligible for Roth in 2020, my bonus for 2019 was payed in 2020 so no way I will be eligible for roth

Topic Author
openmind
Posts: 13
Joined: Mon Jul 08, 2019 1:14 pm

Re: Excess contribution to Roth IRA

Post by openmind » Thu Feb 13, 2020 1:26 pm

Alan S. wrote:
Thu Feb 13, 2020 1:12 pm
MotoTrojan wrote:
Thu Feb 13, 2020 1:04 pm
If you believe you'll be eligible for a 2020 Roth contribution the other option is to roll the excess contribution amount in to 2020. You'll pay a 6% fee on the excess 2019 amount, but won't have to remove the contribution/gains or pay taxes on the gain. Depending on your overall tax situation this may be the lowest cost option. Also doesn't require doing anything more with the brokerage, just under-contribute to your 2020 Roth by the amount of the excess contribution.
A related option to the above if you also expect to over the income limit in 2020 is to pay the 6% excise tax, and just remove the 3840 late in the year. Removal will be tax free but reported on Form 8606. The earnings remain in the Roth, and this avoids tax and penalty on the earnings if you withdrew the excess and earnings. That tax and penalty would apply to 2020 if that is when you made the excess contribution for 2019.

But you cannot make the best decision without being sure of your earnings estimate of 1800. A 30% gain on a contribution you just made is unlikely. How did you come up with that 7800 figure?
I had invested some of that money into Tesla hence the significant appreciation

Katietsu
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Re: Excess contribution to Roth IRA

Post by Katietsu » Thu Feb 13, 2020 2:24 pm

There is one more catch that I do not think was mentioned. If you choose to correct this with a withdrawal, you will be withdrawing the excess contribution plus associated earnings. You will need to withdraw more than you have calculated. The associated earnings will increase your taxable income which will lower the allowed contribution. So you will once again have an excess contribution just a lot smaller.

Do you have any traditional IRAs, SEP IRA or SIMPLE IRA balances? If not, you can recharacterize the excess part of the contribution followed by a Roth conversion. This is commonly known as a Backdoor Roth. You would pay tax only on the earnings associated with the excess.

Alan S.
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Location: Prescott, AZ

Re: Excess contribution to Roth IRA

Post by Alan S. » Thu Feb 13, 2020 11:32 pm

Except you do not have to withdraw earnings if you are willing to pay the excise tax of 6% on the excess.

The excise tax is mutually exclusive with the withdrawal of contribution and earnings by the extended due date. If you pay the excise tax, your earnings are preserved and remain in the Roth. With no earnings being withdrawn, there will be no addition to taxable income and no penalty on the earnings. You DO have to withdraw the excess contribution itself by the end of 2020 to avoid a second year of excise taxes, but that distribution is tax free since it comes from regular Roth contribution basis.

A gain of 30% is usually enough to generate a savings by paying the excise tax for 2020. In fact since the contribution is for 2020, no distribution is needed until late 2021, so the contribution has almost 2 more years to generate more earnings.

Of course, if Tesla tanks (which is very possible) these gains could evaporate quickly and the advantage would then swing back toward removal with earnings. A 2020 contribution can still be removed up to Sept, 2021, and in 18 months a lot of this could change. There is plenty of time to make a decision.

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