Withdrawing excess ROTH contribution after filing taxes

[dvalley]

So I just sent in my ROTH contributions for 2018 early last week after doing my taxes. Before filing the taxes this weekend I found an interest statement which I had forgotten about so I reported it on my taxes and filed both Fed and State. This morning I realized that because of that interest statement my ROTH contribution is over by $727. So looks like I have to fill out a form and mail it to vanguard to remove the $727. The good news is the contribution was just made a few days ago and it's sitting in my settlement fund so interest earned is 2.3% APY.

My question is do I have to file an amended tax return too now for what would be a few cents of interest earned?

 

[HawkeyeNFO]

If it was a bank account and the interest was less than $10, then they don't usually generate a 1099INT. If in doubt, I'd recommend you ask the reps at Vanguard.

 

[Gotadimple]

Don't forget the penalty. And tax software will catch the penalty when you file for 2019.


"
The Penalties

The penalty for an ineligible contribution is 6% of the ineligible amount. You pay this penalty when you file your income tax return using Form 5329.
If you don’t correct the mistake you will have to pay the penalty each year until it is corrected. If you’re not able to take a qualified distribution from your Roth IRA (to correct the mistake) you will pay an additional 10% early withdrawal penalty on earnings (interest)."


https://www.rothira.com/penalties-ineligible-contributions-roth-ira

 

[cathy63]

I believe the interest is 2019 income because you made the contribution this year, even though it was for 2018, so you would report it as an early distribution next year. If it's less than 50 cents, which seems likely if it's only been a few days, then it rounds down to $0 anyway and wouldn't have any effect on your tax return. I wouldn't amend a return for a $0 change.

Another thought ... are you eligible to contribute to a Roth in 2019? If so, I think you can just mentally decide that you have already contributed $727 for 2019 and adjust your future contributions accordingly. Since you made the contribution during a period when you were allowed to contribute for both years, you can divide it up and designate it as partly for 2018 and partly for 2019. Roth contributions are not reported on your tax return, so it doesn't matter to the IRS.

 

[dvalley]

Thanks all. I don't think any penalties apply since I'm withdrawing it before Apr 15th?

Cathy63, that's a good point about the income being in 2019 and also I could divvy up the contributions between the two years. Unfortunately I think the same process will have to be followed though i.e. remove excess from 2018 via mailing in the form and then sending a separate contribution towards 2019 (which I don't know yet whether I'll qualify for or not).

 

[SecondCor521]

You won't pay the 6% excise penalty if you remove the excess (plus any earnings) prior to 4/15.

You will owe 10% early distribution penalties on any earnings while it was in your Roth. This is done either on Form 8606 or part 1 of Form 5329, I can't recall precisely.

Vanguard will eventually send you a 1099-R for the distribution (it's a withdrawal of excess contribution, but they do also refer to it as a distribution). I'd expect it in early 2020.

I think you will need to do the distribution then recontribution if you want to reallocate the contribution to tax year 2019 properly.

Another option would be to leave it in there and pay the 6% excise tax on the excess contribution. I believe if you end up being eligible to contribute to a Roth for 2019, the tax worksheets would then let you carry over the $727 as a 2019 contribution. See option 4 here: https://www08.wellsfargomedia.com/a...planning/correct-excess-IRA-contributions.pdf

 

[Al18]

I don't understand how an interest payment could affect an contribution amount, unless you are very close to the IRA's income limits (135K for single filers and 199K for married).

 

[dvalley]

@SecondCor521 thanks. I sent an email to vanguard asking what I need to do to remove the excess amount, hope they have the process down pat.

@Al18, correct, my MAGI allows reduced contribution and with the additional interest it was reduced even further.

 

[badatmath]

I removed mine by 4/15 one year and did NOT ever get a 1099. I think it was like $12 over contribution though. They did calculate and take out "earnings" as well.

 

[N02L84ER]

You can have them recharacterize the overage as a nondeductable IRA along with any earnings. Then there is no tax issue until you start withdrawals. It will mean you will have to file an 8606 form, potentially for the rest of your life.

 

[kaneohe]

You can have them recharacterize the overage as a nondeductable IRA along with any earnings. Then there is no tax issue until you start withdrawals. It will mean you will have to file an 8606 form, potentially for the rest of your life.

The annual limit on contributions is for both Roth/TIRA combined. If you are over limit on Roth and recharacterize excess as TIRA , you are still over limit.
Excess needs to be contributed to another yr.....not sure if you can recharacterize to another yr.

 

[dvalley]

Just wanted to provide an update for posterity. I called and talked to their rep. I asked him about all three options the folks mentioned above i.e.

1. Remove excess amount, pay the tax on the earnings. No penalty.
2. Re-characterize the excess to IRA.
3. Re-characterize the excess amount as contribution towards 2019 ROTH.

I chose option 3 as that has no penalty, no tax mess and if the excess amount is within my ROTH contribution limits for 2019 (given higher MAGI) there won't be any tax mess for year 2019 either.

Thanks again to everyone here who contributed!