Author Topic: Technical tax question about overcontribution to a Roth and the 6% excise tax  (Read 3425 times)

secondcor521

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I realized a few days ago that I overcontributed to my Roth in 2012.  I will comply with the law but would like to avoid the 6% excise tax.  I'd appreciate any help.

Facts:

I made a $5K contribution to my Roth IRA in January 2012 for the 2012 tax year.
I filed my 2012 taxes in February 2013.
My MAGI was within the Roth IRA contribution income phaseout limits for my filing status.
I have completed the worksheet in Pub 590 and have discovered that my reduced Roth IRA contribution limit for 2012 is $4,170.  I therefore have an excess contribution of $830 for 2012.
I made a $5K contribution to my Roth IRA in January 2013 for the 2013 tax year.

I read from Pub 590 here http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231012:

"Withdrawal of excess contributions.   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
  If you timely filed your 2012 tax return without withdrawing a contribution that you made in 2012, you can still have the contribution returned to you within 6 months of the due date of your 2012 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.
Applying excess contributions.    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year."

Question:  Can I avoid paying the 6% excise tax if, based on the last sentence quoted above, I withdraw $830 plus associated earnings from my 2013 Roth IRA contribution?  Or must I withdraw the $830 plus associated earnings from my 2012 Roth IRA contribution and file an amended return as described in the previous paragraph?

Thanks to anyone willing to read this and offer an opinion.

Hamster

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I realized a few days ago that I overcontributed to my Roth in 2012.  I will comply with the law but would like to avoid the 6% excise tax.  I'd appreciate any help.
..."Withdrawal of excess contributions.   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
  If you timely filed your 2012 tax return without withdrawing a contribution that you made in 2012, you can still have the contribution returned to you within 6 months of the due date of your 2012 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.
Applying excess contributions.    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year."

Question:  Can I avoid paying the 6% excise tax if, based on the last sentence quoted above, I withdraw $830 plus associated earnings from my 2013 Roth IRA contribution?  Or must I withdraw the $830 plus associated earnings from my 2012 Roth IRA contribution and file an amended return as described in the previous paragraph?

Thanks to anyone willing to read this and offer an opinion.
(usual caveats--talk to a CPA. I'm no expert.)

You need to recharacterize (or withdraw) from your 2012 contributions, and pay appropriate tax on the earnings, but no excise tax on the overcontribution as long as you do it by Oct 15. Once you recharacterize, it's as if you never put that money into the Roth, so it's treated as if it were in any taxable account from the time you contributed.

The last paragraph basically states that when you withdraw the funds, you have the option of applying them to your 2013 contribution rather than take the cash. It doesn't say you can withdraw from 2013 rather than 2012 contributions. The excise tax is on excess contributions, not the earnings. You will need to pay applicable taxes on the earnings from the overcontribution in 2012 regardless of whether you take that all in cash or apply it toward 2013 contributions.

If you are with Vanguard (or whoever), just call and talk to their people and ask them how to do a recharacterization. It is pretty easy, and they issue a revised a 1099 for you to determine the tax ramifications based on the earnings from the overcontributions.

This was based on past conversations with Vanguard and my CPA, when I had to recharacterize a couple of years ago, but please confirm with your own sources.

secondcor521

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Thanks for the reply.

The Roth IRA is with Vanguard, so I'm going to call in and talk with them.  I'm sure they can do these things in their sleep.

I think I'll just take the clear path and withdraw the excess contribution plus earnings by 10/15, get the 1099 from Vanguard, and file amended returns with the feds and my state.

(My thought process with withdrawing from the 2013 contribution was a two-step process - treat the $830 excess contribution as a 2013 contribution (based on the last sentence of the IRS quote)...which would then put me at $5,830 for 2013, but I could then withdraw that $830 excess from 2013 now since the 2013 tax year is still open.  This is legally questionable, and I don't feel like parsing through the tax code to figure it out, and since it's not clear if that money would still be subject to either taxes on the earnings or excise taxes on the overcontribution, I'm going to just skip it and go the obvious route.)

Thanks again for the input.