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Hello,

While preparing 2013 Tax Return I have discovered that I was not allowed to contribute to my Roth IRA in 2011 due to the AGI limitations. I did contribute $5,000 in 2011.

I understand that I have to file amended 2011 and 2012 returns both having form 5329 added and pay 6% excise tax on the excess amount (=5,000) for both years. I will also file 5329 for 2013, but since I caught it before April 15, 2014 it will be on the original return.

I am also planning to remove both principal (=5,000) and earnings in order to correct the excess contribution and avoid paying 6% excise tax in subsequent years. My broker (E-Trade) will not calculate earnings on contributions made during years prior to 2013, so I will have to do it myself -- I did find the IRS Worksheet in Pub 590 to calculate the earnings -- and I will do so.

Everything that I have read so far says that I need to report the earnings portion of the return as regular income as well as calculate 10% early withdrawal penalty on it (since I am younger than 59 and 1/2) for the year the excess contribution was made, NOT for the year it was removed.

My question is to confirm the above: If I make the withdrawal from my Roth IRA of 2011 excess contribution (both principal and earnings) in March 2014, do I report the earnings as regular income and calculate 10% penalty on the earnings amount on form 5329 on my amended 2011 return?

Thank you in advance,

boris
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While preparing 2013 Tax Return I have discovered that I was not allowed to contribute to my Roth IRA in 2011 due to the AGI limitations. I did contribute $5,000 in 2011.

I understand that I have to file amended 2011 and 2012 returns both having form 5329 added and pay 6% excise tax on the excess amount (=5,000) for both years. I will also file 5329 for 2013, but since I caught it before April 15, 2014 it will be on the original return.


Here's what I understand happened:

2011: $5,000 Roth contribution; all excess
2012: You don't say what you did. We need to know
2013: Roth contribution; all excess

The only thing we can say for sure at this point is that you owe the excess contribution penalty of $300. You do not have to amend your 2011 1040. Just file the 5329 along with the $300.

<I?I am also planning to remove both principal (=5,000) and earnings in order to correct the excess contribution and avoid paying 6% excise tax in subsequent years. My broker (E-Trade) will not calculate earnings on contributions made during years prior to 2013, so I will have to do it myself -- I did find the IRS Worksheet in Pub 590 to calculate the earnings -- and I will do so.

Please don't. The only year you need earnings for is 2013.

Everything that I have read so far says that I need to report the earnings portion of the return as regular income as well as calculate 10% early withdrawal penalty on it (since I am younger than 59 and 1/2) for the year the excess contribution was made, NOT for the year it was removed.

You're very confused. Get back to us about 2012 and we'll finish.

Phil
Rule Your Retirement Home Fool
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Hi Phil,

Thank you very much for responding.

I didn't want to complicate already complicated situation in my original post, but here is the full story:

2011: $5,000 Roth contribution; all excess
2012: $5,000 Roth contribution; all excess
2013: $5,500 Roth contribution; all excess; already removed along with earnings ($585, E-Trade calculated for me)
2014: $5,500 Roth contribution

From reading Pub 590 I understood that the excess contribution(s) along with earnings have to be removed from the Roth IRA in order to stop paying 6% excise tax each year it remains there. Please let me know what will happen if I leave it there.

Thank you again for helping me out,

boris
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From reading Pub 590 I understood that the excess contribution(s) along with earnings have to be removed from the Roth IRA in order to stop paying 6% excise tax each year it remains there. Please let me know what will happen if I leave it there.

We have to break your problem years into two groups.

Group 1: 2011-2012
Group 2: 2013-2014

For group 1 you cannot avoid the 6% penalty. However, the penalty is charged on only the contribution. Complete Form 5329, Part IV, for each year. One per year, and get the right years' forms. These you can file alone, one per year. The penalty on each is $300.

Group 2: We can now fix things without penalty.

1013: Complete Form 5329, Part IV, showing a zero contribution for 2013. The bottom line will be zero penalty, zero excess on hand.

If earnings for either year were positive report on line 15b.

That'll take care of it assuming you don't make any more IRA contributions for 2014.

Phil
Rule Your Retirement Home Fool
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>>> For group 1 you cannot avoid the 6% penalty. However, the penalty is charged on only the contribution. Complete Form 5329, Part IV, for each year. One per year, and get the right years' forms. These you can file alone, one per year. The penalty on each is $300.

Form 5329 Part IV (2011) -- to be filed in 2014 to amend 2011 return
------------------------
Line 18: 0 (no excess contribution in 2010)
Line 19: N/A
Line 20: N/A
Line 21: N/A
Line 22: N/A
Line 23: 5,000 (excess for 2011)
Line 24: 5,000 (total excess)
Line 25: 300 (tax owed)

Form 5329 Part IV (2012) -- to be filed next in 2014 to amend 2012 return
------------------------
Line 18: 5,000 (excess contribution in 2011)
Line 19: 0
Line 20: 0 (no distributions)
Line 21: 0
Line 22: 5,000 (excess for prior years)
Line 23: 5,000 (excess for 2012)
Line 24: 10,000 (total excess)
Line 25: 600 (tax owed)

The excess contribution for 2011 gets counted toward the total excess. As far as I can tell, this will continue happening for future years until a distribution is made to withdraw the excess contribution.

From your earlier responses I believe you disagree with this conclusion. Could you please explain how you see Line 24 going down unless the distribution is made.


Thanks again for clarifying things,

boris
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The excess contribution for 2011 gets counted toward the total excess. As far as I can tell, this will continue happening for future years until a distribution is made to withdraw the excess contribution.

From your earlier responses I believe you disagree with this conclusion.


No, actually I agree with you. I think this is how it should go.

2011: File 5329 showing a $300 penalty
2012: File 5329 showing a $600 penalty

2013: You have withdrawn the contribution and earnings. File Form 5329 with your return showing a $600 penalty.

2014: Withdraw $15,000 plus the earnings on the 2014 contribution. If you want to consider Traditional IRAs you can also recharacterize. When you file your Form 5329 with your w014 return you'll wind up with a zero excess contribution and penalty.


Phil
Rulr Your Retirement Home Fool
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Hi Phil,

After talking to an IRS representative she helped me clarify my original confusion -- the one you pointed out regarding me thinking that I would have to withdraw both principal and earnings for prior years. From my original post: "I am also planning to remove both principal (=5,000) and earnings in order to correct the excess contribution and avoid paying 6% excise tax in subsequent years. My broker (E-Trade) will not calculate earnings on contributions made during years prior to 2013, so I will have to do it myself -- I did find the IRS Worksheet in Pub 590 to calculate the earnings -- and I will do so."

The representative confirmed that I only need to withdraw the principal of the excess contributions made in 2011 and 2012. The logic being that one should not be charged both a 6% penalty and an income tax penalty on the earnings (+ 10% early withdrawal if under 59 and 1/2) for the same year. Only one or the other. So either:

a) one withdraws principal + earnings before due date + 6 months grace period and pays income tax on earnings (+ 10% early withdrawal tax)
or
b) if the deadline for withdrawal for that year has passed, one will pay 6% excise tax penalty for that year and will only have to withdraw the principal excess later.

So, for my case:

2011: Amended return; form 5329 (2011); $5,000 total excess; $300 - 6% excise tax
2012: Amended return; form 5329 (2012); $10,000 total excess; $600 - 6% excise tax
2013: On-time return; 2013 $5,500 contribution withdrawn before tax filing deadline; $585 earnings on 1040 line 15b; 10% on early withdrawal penalty (=58) form 5329, line 1; $10,000 total excess; $600 - 6% excise tax
Simetimes in 2014: $10,000 excess withdrawn.
2014: On-time return(*); form 5329; $0 total excess; $0 - 6% excise tax

(*) Since I also already contributed $5,500 toward 2014 I will have to determine how much I was eligible to contribute and whether there is excess for 2014 (my projected AGI is going to be lower in 2014 then in 2013)

I hope this summary might help another member who may find herself in the similar predicament.

boris
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