Excess Roth IRA contribution

[SecondCor521]

Hi all,

In 2018 my son made about $4500 but contributed $5500 to his Roth IRA.

I have the form from his IRA custodian for him to fill out to withdraw the $1000 excess plus any attributable earnings. He will do so before the due date for his 2018 return (4/15/19).

He'll probably be able to take the Retirement Savings Credit and I assume he can just use the $4500 figure which represents his net contribution.

I think he needs to report the attributable earnings on his tax forms. Q1: How should he obtain the right dollar amount to report? Q2: On which tax form should he report it?

(Regarding Q2, I see references to Form 5329, but that appears to be only if one leaves an excess contribution in the account.)

 

[SecondCor521]

Answered my own question

From https://www.irs.gov/pub/irs-pdf/i8606.pdf page 4 column 3 “Return of IRA contributions”:

"If, in 2018, you made traditional IRA contributions or Roth IRA contributions for 2018 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2018 tax return, the returned contributions are treated as if they were never contributed. Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2018 and any related earnings on your 2018 Form 1040, line 4a; or Form 1040NR, line 17a. Also include the related earnings on your 2018 Form 1040, line 4b; or Form 1040NR, line 17b. Attach a statement explaining the distribution. See Pub. 590-B to determine whether you can deduct any loss that occurred. Also, if you were under age 59 1/2 at the time of a distribution with related earnings, you generally are subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts)."

I'm also going to assume that his custodian does the calculation properly and whatever the difference is between his $1,000 excess contribution and whatever they actually remove from his Roth is the amount of NIA (net income attributable).

So that's what we'll do I guess.

 

[kaneohe]

Nice find! Lots of other stuff telling you what to do w/o really telling you how

 

[SecondCor521]

Sigh.

So he filled out the form and gave it to his custodian requesting that they remove $1000 plus earnings. His custodian removed $5500 plus earnings. Stated another way, they removed his entire 2018 contribution plus earnings, not just the $1000 excess. Stated another way, we believe the custodian screwed up.

If we leave things this way, I believe he'll have to pay about 5 times the amount of 10% penalty on Form 5329.

How is this fixed? We'll probably stop by the custodian's local office to discuss with them. I'm not sure they can fix it given that the transaction has already been recorded...?

If they can't reverse the journal entry, would they be able/willing to reimburse my son for the excess taxes they've created? Seems like they should.

 

[ocean view]

Yes, it does seem like they should.

If they do, they’ll probably be required to report it as income to your son in 2019. Make sure they gross-up any reimbursement and remit the gross-up to the IRS/state as withholding. Otherwise he won’t be made whole.

 

[SecondCor521]

I didn't think about grossing it up, but that makes sense. Noted, and thanks.

 

[kaneohe]

I haven't had this particular problem before but I assume if they want to do something bad enough, they can fix it so if doesn't get corrected immediately,
I would escalate the problem higher to a manager. I assume you have a copy of the 1K request.....should be easy for them to recognize as their bungle.

 

[SecondCor521]

We didn't save a copy of the paperwork. We just filled it out in their office and handed it to them. But I did double check that he filled it out correctly as I was looking over his shoulder. And of course I am on heightened alert whenever doing something unusual like this.

He did ask the receptionist to review the paperwork to make sure she could read everything and that it was filled out properly.

I would hope (?) that the custodian would scan and save copies of the paperwork to protect themselves, but maybe not.

I did tell my son to be prepared to escalate to a manager.

...

In thinking about it more, I will talk to my son about the practicality of whether or not to pursue this. The penalty is 10% of the earnings, and since the earnings were only about $300 on the total amount, the penalty is only ~$30. And since he legitimately owes ~1/5th of that, the total savings is only ~$24.

I assume he could still re-contribute the $4500 back into the Roth.

But there is sort of the principle of paying attention to things and making sure things are done correctly, so I think we will pursue it at least a little bit.

 

[SecondCor521]

I stopped by the custodian's local office today to discuss.

They said they make copies of all paperwork as a matter of course, and that they could and would fix it if requested.

Not sure which is easier: Have them fix it, or just recontribute the $4500.

Can he recontribute the $4500 in this case? I would think so but would like confirmation if anyone knows.