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How to handle excess Roth IRA contribution


nkaufman
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Hello,

Made a Roth IRA contribution in April 2021 for Tax Year 2020. 

Got an extension to file taxes.

Found that I have made 1K contribution more than allowed. 

I thought Fidelity could just reduce the amount for 2020 by 1K and put 1K as contribution for 2021 as this is Roth IRA and contribution was made in 2021.

But it seems that they cannot do it past filing deadline of May 31 this year.

What is the best/easiest way to handle this? There seem to be a few ways here.

Age less than 57

 

Thanks

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1 hour ago, Lou S. said:

Ask them if they have a form for removing Excess IRA contributions. Since the deposit was made in 2021, it shouldn't be too hard to removed the excess plus earning timely to avoid the 6% excess tax on excess IRA contributions.

Thanks, I'm asking them for details.

It seems I need to withdraw funds from the account to my bank account (or open a non-retirement account and put the money in there) and then use the same funds to contribute for 2021.

For 2020 Tax Return, it seems I do not have to do anything. Is that correct?

For 2021 Tax Return, I might have to add the excess contribution and earnings (say $1) to my income. Need to find out what other penalty or fines there are for this.

Thought there would be a simpler way since Contribution was done in 2021 for 2020 Tax Year.

 

 

From this site: https://www.thebalance.com/what-to-do-if-you-contributed-too-much-to-your-roth-ira-3192888#citation-4

Move the Contribution to the Next Tax Year

The IRS also lets you apply any contributions that are over the limit toward the following year.

Let's say Robert has to withdraw $1,000 of his Roth IRA contributions because he's over the limit based on his income. He can simultaneously withdraw $1,000 from his contributions for tax year 2020 and contribute the same $1,000 for tax year 2021. The withdrawal and re-contribution are combined into one action.

Simply instruct your IRA plan administrator that you're applying a certain contribution amount to the next tax year.

The IRS says that you can apply the excess contribution in one year to a later year as long as the total contributions for that later year are less than the contribution limit for the year.

------------------------------------end of site content ----------------------------------

But the steps I'm being asked to follow ain't as simple  :) :)

 

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It seems like there should be an easy way to do this internally like just designating $x for 2020 and $y for 2021 but that doesn't seem to be how the IRA custodian is set up. And while it is a pain and more a form over substance thing it does appear you have the mechanics and tax implications correct.  Since the "over contribution" was in 2021 and being corrected prior to the dute date of you 2021 tax return, there should be no additional penalties which respect to this transaction.

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50 minutes ago, Lou S. said:

It seems like there should be an easy way to do this internally like just designating $x for 2020 and $y for 2021 but that doesn't seem to be how the IRA custodian is set up. And while it is a pain and more a form over substance thing it does appear you have the mechanics and tax implications correct.  Since the "over contribution" was in 2021 and being corrected prior to the dute date of you 2021 tax return, there should be no additional penalties which respect to this transaction.

It seems there could be a 10% penalty for earnings withdrawal ($0.10 on $1 earnings approx), So that shouldn't be that bad.:P

Thanks for your assistance

 

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