Paying the penalties for excess contributions over three years.

[Guest BoyAlex]

Thanks for all the help. Here is the history and what we plan to do:

The original Roth was created in the last days of 2001 and for the year 2001. We will file a 5329 form and pay the 6% penalty on the RMD for 2001 and again the same for 2002. It is good that software is available to us to generate these forms for the specific years – which pub 590 calls for. As far as I can tell, the IRS offices have only forms for the year 2002.

But to the best of my ability, since the Roth has now been cashed out entirely, no penalty is assessed for this year.

If we have made any errors, please point them out to us.

[Appleby]

Your are right. No penalty will apply for 2003 providing the excess is removed by the 2003 tax filing date.

Bear in mind that excess Roth IRA contributions are deemed allocated to the next year’s contribution until removed or the total is allocated. So if the individual was eligible for a Roth IRA contribution for 2002 and did not contribute, then $3,000 (or the amount he/she was eligible to contribute) would be deemed a 2002 contribution. Therefore, the individual may leave the $3,000 in the Roth IRA, remove the remaining excess, and will owe penalty on the excess – the 2002 contribution