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If you are eligible for a ROTH contribution in 2019, there is one more choice. The penalty for the over contribution is 6% annually. You have the option to pay the 6% penalty on $1,520 for 2018 and use it as part of your 2019 contribution.

I don't believe that the return on the over contribution is included in the penalty.
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I realized that I made an over contribution to my Roth IRA. Actually , I have two Roth IRAs and I forgot that I had already sent a $4770 contribution to one of them earlier in 2018. (I am eligible for a contribution of $6500.) I sent a second contribution of $3250 to the second Roth. I am aware that $6500 is the total combined contribution that I can make. So now I need to undo that to the tune of $1520. My questions: Does it matter which of the two Roth IRA accounts I take this money from -- or must it be from the very account that sent me over the limit? Does this have to be done by December 31? --or could it be done in early 2019, but before I file a tax return?
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You can withdraw the excess from either account, but I'd use the second account, which put you over the top, because the date of that contribution, not the first contribution, is the date from which the custodian has to calculate the earnings that must be withdrawn, in addition to the excess contribution. And the earlier date is otherwise irrelevant to the second custodian.

You have until the extended due date of the return to do that, to avoid the 6% penalty on excess contributions, but I'd say do it now. You will not benefit from waiting, because, as noted, the earnings on the excess contribution have to be withdrawn as well. And the earnings are taxable income, even from a Roth. And if you're under 59.5 years old, the 10% early withdrawal penalty also applies to the earnings. And it you can do it by 12/31, the whole mess will be in one calendar year, and easier to keep track of. So I'd call the custodian today, to get the process rolling. There are a lot of IRA transactions in December, and time is getting short.

Bill
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So now I need to undo that to the tune of $1520.

Actually, it needs to be $1520 plus any earnings on the $1520. And then those earnings become taxable income to you in the year that the excess contribution was made.

My questions: Does it matter which of the two Roth IRA accounts I take this money from -- or must it be from the very account that sent me over the limit?

It doesn't matter, since IRA stands for "Individual Retirement Arrangement" and all IRA accounts of the same type for the same owner are considered part of the arrangement.

Does this have to be done by December 31? --or could be be done in early 2019, but before I file a tax return?

It could be done later - up to 6 months after the original due date of your 2018 return, if your return is filed timely. But doing it in 2018 would probably be simpler, because you need to count the earnings in 2018. Here are the rules on withdrawals of excess contributions from IRS Pub 590-A https://www.irs.gov/pub/irs-pdf/p590a.pdf

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 2017 tax return without withdrawing a contribution that you made in 2017, you can still have the contribution returned to you within 6 months of the due date of your 2017 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.

AJ
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If you are eligible for a ROTH contribution in 2019, there is one more choice. The penalty for the over contribution is 6% annually. You have the option to pay the 6% penalty on $1,520 for 2018 and use it as part of your 2019 contribution.

I don't believe that the return on the over contribution is included in the penalty.
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To summarize much of what has correctly been offered, you have 2 choices:

1. Withdraw the excess Roth contribution along with any earnings. The earnings will be ordinary income and subject to the 10% early withdrawal penalty unless one of the exceptions applies (age 59.5 the most common exception). You have until Oct 15, 2019 (or designated day if oct 15 falls on a weekend) to do this.

2. Leave in the RIRA and designate it for part or all of your 2019 RIRA contribution. You will be assessed a 6% penalty you'll pay when you file (form 5329), but the penalty is only on the excess contribution, not the contribution + earnings. But you must be otherwise eligible to make the RIRA contribution in 2019. This may be a better option if your RIRA holding this excess contribution has high investment returns for 2018.

The most common cause, at least in my travels, for an excess RIRA contribution is the contributors MAGI unexpectedly went over the max for making a RIRA contribution. For this group there is a 3rd alternative: recharcterize it and its earnings to a TIRA assuming the contributor is not yet age 70.5 or older. No tax and no penalty. But this, unfortunately, wouldn't apply to you.

BruceM
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subject to the 10% early withdrawal penalty

10% federal penalty, your state may add additional penalty
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Wradical,

You wrote, You can withdraw the excess from either account, but I'd use the second account, which put you over the top, because the date of that contribution, not the first contribution, is the date from which the custodian has to calculate the earnings that must be withdrawn, in addition to the excess contribution. And the earlier date is otherwise irrelevant to the second custodian.

nit: Technically I think the excess contribution is supposed to be calculated based on the earnings of the entire Individual Retirement Arrangement - not just one account or the other. In theory picking one or the other could be used to game the withdrawal to minimize the earnings to be taxed. So I believe you are *supposed* to take the earnings across all accounts into consideration.

Also, You have until the extended due date of the return …

Isn't this only true if culcha didn't do this as a backdoor Roth IRA contribution? Wouldn't the new recharacterization restrictions make undoing an excess contribution after the calendar year a little problematic?

- Joel
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Joel
I'd reason the same thing. But Pub 590-A, p.32 says

More than one IRA. If you have more than one IRA, figure the amount to be recharacterized only on the account from which you withdraw the contribution.

But clearly, you can only use the IRA to which the original contribution was made.

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Per worksheet 1-3, the amount to recharacterize is the ratio of the gain (or loss) on the IRA with the conversion amount, divided by the value of the IRA when the conversion amount was added. Multiply this by the original contribution amount and that will be the amount to recharacterize.

BruceM
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BruceCM,

You wrote, I'd reason the same thing. But Pub 590-A, p.32 says …

Wow. Those instructions appear to directly conflict with the IRS's interpretation in other places. I wonder if this is how the actual statute reads?

- Joel
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