How to handle an overcontribution

[Guest gpohl]

Vanguard charges a .005% fee when investing in their Small Company Growth Index Fund (VISGX). They purport that it is not a load, but to investors, it is in substance the same thing. In making my 2003 contribution, I added the .005% to my contribution. In actuality I contributed to a few different funds, but for illustrative purposes, had I put it all in this fund, I would have sent $3015, which would have purchased $3000 in shares, and paid Vanguard the remaining $15 (.005% of 3000). I did only get $3000 in shares and Vanguard got the $15, but Vanguard treated the entire $3015 as a 2002 contribution on my statement. What are the ramifications of this? How should I address it? Obviously it is not a significant $ amount, but I would like to treat it appropriately for legal and tax purposes. Thanks.

Gpohl

[Guest Nighthawk]

Vanguard no longer charges a purchase fee for VISGX (small cap index fund).

NK

[John G]

The IRS will regard this as overfunding your IRA. Some custodians allow you to pay with a separate check the annual fee. It is not clear that you are talking about a specific set fee. It sounds like Vanguard did not offer this to you but you assumed you could compensate for the fee. Call Vanguard and talk to them. I suspect you will need to write Vanguard a letter and request the money to be returned. The nature of this expense may not allow separate payment.

I do not believe that "loads" are eligible for this separate check, separate treatment. Talk to Vanguard.

[mbozek]

IRS Rev. Rul 84-146 permits the deduction of IRA fees and expenses by the IRA owner as a miscellaneous deduction under the same conditions as a deduction of fees and expenses for qualfied plans provided that the fees are paid to the IRA service provider by the owner and do not come as a reimbusement from the IRA. For this discussion a fee is not a charge for the cost of buying and selling an investment in the IRA. The IRA fees and expenses must be separately identified in a statement sent to the IRA owner. According to the statement from Vanguard for tax purposes you made a $3000 contribution and paid a deductible expense of $15 subject to the 2% floor under 67.

[John G]

The original post said Vanguard considered the total of 3,015 to be contributed for 2002. Therefore, he has a problem.

Call Vanguard and ask them how this might be corrected. If Vanguard makes no provision for "fees" to be paid directly, then you need to withdraw the $15 overage. You have both IRS and custodian issues here. The IRS can allow something, but the custodian may decide not to support it. In my experience with Bear Stearns and other brokerages, this option is only available on annual fees and must be done by separate check during a specific time window that is less than 60 days. It is a specific program, not a self electing option. When this program is offered you can avoid trimming off the value of an IRA to pay the annual fees which goes beyond the deduction issue.

If Vanguard never offered this option to you, then they are unlikely to support your view. A phone call should reveal their policy. Vanguard is a great fund family but they aim for extremely low expenses and do not support every option that other custodians may support. Good luck with this.

[mbozek]

If Vanguard reports to IRS that you made a contribution of $3000 then for IRS purposes you can rely on that statement. According to the Vanguard forms that I have seen fees are added to the amount of the annual contributon. Question of $15 fee is an audit issue but IRS rarely audits IRAs and taxpayer has substantial authority under rev rul for treating fee as a separate charge if it is identified. Remember worst case is that excess is subject to 6% excise tax which would result in annual tax of 90 cents.

[Guest gpohl]

Thank you everyone who posted advice on this. I called Vanguard and this is the result:

Vangaurd (and I assume any custodian) provides a form for early withdrawals from Roth IRAs. A letter can also be written to the custodian, as correctly pointed out above. Removal of Excess is one of the reasons for an allowable early withdrawal. The withdrawal can be made from any fund with that custodian that is part of one's Roth IRA account (not necessarily the one that resulted in the overage). The total value of the portfolio (all funds) at the time the withdrawal is to be made is compared to the total value of the portfolio at the time the excess was added. Any capital gains are pro-rated and added to the total to withdraw. There is a 10% early withdrawal penalty owed to the IRS on the pro-rated capital gains, in addition to the normal capital gains taxation. Nothing is owed on the principal. In the event of a capital loss, the full amount of the overcontributed principal is withdrawn (i.e. no pro-rating the loss), and no penalty is due.