Roth IRA -- 2003 excess applied as a 2004 contribution.

[katieinny]

A client was just told by his financial institution that he overcontributed to his Roth IRA for 2003. It is past his tax filing date. I understand that he can apply the excess as a contribution for 2004, but is the 6% excise tax still applicable?

[Appleby]

The 6 -percent excise penalty applies if the excess is not removed by the individuals tax filing date, including extensions….and would therefore apply if he chooses to leave it in the IRA and apply it to the 2004 tax year. However, individuals who file their tax return by April 15 receive an automatic 6-months extension-to October 15 to remove the excess. Therefore, assuming your client file his tax return by April 15, he still has until October 15,2004 to correct the 2003 excess.

[katieinny]

So, if I understand you correctly, as long as he applies the excess as a 2004 contribution by October 15, the 6% penalty will not apply. (He did file his return by April 15.)

[Appleby]

Not really.

The October 15 deadline applies to removing the excess from the IRA, thereby avoiding the penalty. The only way to avoid the 6-percent penalty is to remove the excess amount.

If the amount is left in the IRA and applied to 2004, or left in the IRA beyond October 15,2004, then the 6-percent penalty will apply.

It may be more practical to remove the excess and redeposit the amount. In this case, the earnings must be removed and may be subject to income tax and the 10 percent early distribution penalty, but the taxes and penalty may be less than the 6% penalty.