Roth IRA contributions withdrawal

[Guest channel121]

Here is my situation:

I have two Roth IRA's(one just transferred to new instituiton).

1) The one I have with scottrade has contributions totalling $1500.

2) The other with Fidelity has about $2000 in contributions.

3) And the one I tranferred to Scottrade from USAA had about $1700 in contributions. By the end of the year I will have gone over my max contribution of $4000 by about $1500 dollars. I have already withdrawn $500 from one of them(scottrade) to try to offset this and keep doing my usual monthly contribution of $300. The reason I am over by so much is because I got overzealous and was doing stock purchases in between my monthly mutal fund purchases(to a total of about $1500).

I want to know how to withdrawal the excess. I read that the IRS considers premature distributions as coming from the contributions first then after that you are considered to be taking the money out of your earnings and that is taxable and penalized. I did this last year for a very small amount(<$500) but my bank was easier to do the withdrawals. Scottrade required I fill out a distribution form so I marked premature thinking it would still be considered part of my contributions to that account when I do my taxes.

A few more caveats:

1)I have excess medical bills to pay.

2)I am a student but recieve ed loans to help with tuition.

I understand these are exceptions that will allow early withdrawal as well. And both 1 & 2 are well over $1500. This is my second option if I mess(ed) up the excess contribution rule.

I am 27. Not a homeowner. Make under $15000 this year(not counting ed loans).

My first question is how to correctly do the withdrawals of excess contributions? Is this more a matter of filing my taxes correctly? Can I withdrawl the excess from either account even if it is more than my contributions to that particlar account(but not for all my accounts total of course)?

For example: Can I withdrawal another $1500 from scottrade even though that would be more than my contributions to that account(only $1500) Any help would be great.

[John G]

PLease clarify - you said two IRAs but then talked about three balance amounts. Also, are all of these related to 2005, 2004 or some combination of years.

The very first thing you should do if you have overfunded and IRA is stop any additional monthly contributions. That only makes the problem more complicated and may mean you have to do more than one adjustment.

Assuming that all of the these funds refer to just the current year.... your best chance to correct the problem is to contact the IRA office (not just any clerk, but the specialists in the back room that handle IRAs) at each custodian and explain the problem. You will need to not only withdraw the extra contributions but also the earnings on those contributions (the second part makes it much more complicated).

Remember that in early January, you can redeposit some of the funds that you must remove now.

[Guest channel121]

Sorry it was so complicated but thanks for you assistance. I have two ROTH's right now. My contributions are over $4000 for all Roth IRA's combined for 2005.

1)I understand I can just apply any excess($470 for 2005) to my 2006 ROTH IRA. Do I have them apply the earnings on the $470 to 2006 as well? I do not have to take out the excess but do have to pay the excess contribuition penalty of 6%. So about 30 bucks.

2)I just realized I did this in 2004 too. I had overcontributed $530. So I took an early distribution($595) thinking that was all I needed to do. Now I realize I needed to fill out an "excess withdrawal form" and the earnings on that amount. I did claim the early distribution on that tax return so does that mean I am okay? DO I still have to go back and take out $530?

I can't go back. But I don't want to owe thousands twenty years from now. So I want to get this right. Here's what I see:

1)I have to pay 6% on 2004 and 2005. I will have to amend my 2004 return. What form for that?

2)I paid my taxes in 2004 on the early distribution but not for 2005 early distribution yet obviously. I can claim the school expenses exemption(08) and avoid the tax penalty for this tax year.

3) But I still have to take out the excess contribution for 2004. How do I do that now? Do I take it from any of my Roth accounts?

I don't think I can afford an accountant(a poor grad student) so lots of advice here has helped me. My situation is so muddled i still can't figure it out. How much would it cost to have an accoutant take care of something like this?

[Guest Fishchick]

If you made your excess contributions in 2004, you have until 10-15-05 to correct them assuming you filed your tax return on time or got a valid extension.

If you made your excess contributions in 2005, you have until 10-15-06 to correct them assuming you file your tax return on time or get a valid extension.

The simplest way to correct the excess contributions is to have the financial institution remove it as a return-of-excess contribution. They will calculate the earnings amount and send you a check for your excess plus earnings. If you do it this way, you are only subject to a 10% penalty on the earnings, which may be offset by an exception to the penalty if you qualify. The earnings are taxable for the year in which you actually made the contribution (not always the same year for which you counted it).

If you don't remove the excesses on time, the whole contribution is subject to a 6% exise tax for each year the uncorrected excess remains in the IRA. If you can use the excess in a future year, that will correct the problem that year. You can also remove the excess after the deadline and that will stop the 6% penalty from accruing any more after the year you remove the excess.

You file IRS form 5329 to report correcting the excess no matter which method you use (Remove on time, carry over, or remove late).

Hope that helps.

[Guest channel121]

Thank you so much Fishchick. You really cleared up alot. I can manage the current 2005 excess and get the appropriate (excess contribtion forms, early distribution)forms. But if I go the route of putting it foward to 2006 and call the institution all I do is file a 5329? No distribution forms or excess contribution forms, right?

One last question: Can I use any account to do the excess distribution withdrawal? I ask b/c in 2004 I was over by $500 between two roth accounts. So can I take out the excess from Company A (total contribution =$2000) OR company B(total contribution=$1500). Since I did not overcontribute to one single institution, can I take a distribution from either to offset the excess amount?

Again, thanks for the info. I have Oct 15th marked on my calendar. I will get my 2004 fixed just need to know where I take it out of.

Investment houses have tended to be not helpful on these issues when I have asked. I know tax laws are different for everyone but I am usually told to ask my accountant. Just some basics of how a distribution can be done would be helpful. I took out an early distribution b/c of bad advice from a Scotrade rep. Probably misguided, but he never mentioned the excess contribution form and told me to mark premature, non-qualified and that would take care of it. Guess it is better just to say, "I don't know. And I figured there is no way to recharacterize that early distribution since no earnings where included and excess form was not filled out.

[Guest Fishchick]

If you took out the Scotrade in the last 60 days, you could roll it over as a 60-day rollover, if you haven't already done that in the past 12 months. If it's longer than 60-days ago, you might be able to re-file your taxes, and you can report on a 5329 that your financial institution used the wrong reporting code on the distribution. I'm assuming that the $595 included all your earnings, i.e. you put in $530, and it grew to $595, that's why you took it all out. You would only owe taxes and 10% penalties on the $65 earnings. That would save you taxes on $530.

The institutions may have a special form for a return of excess. You should probably remove the excess from the account that received it. That is, wherever you made the contribution that took you over the limit.

If you carry over the excess, you just file the 5329, but it might cost you more that way.

6% of $500 is $30.

10 % of earnings (even assuming you made a great return) is probably much less. Also the earnings are taxable. So if you made 25% that's $12.50 penalty and taxes on $125. You said you might qualify for a waiver of the penalty as well, which wouldn't apply to the 6%.

It's not much $ either way.

[Guest channel121]

Since time is of the essence--->Okay, maybe I do not have to do anything with the 2004 overlimit. I took out a distribution but that was not the "over" amount of $530 + earnings. It was just an arbitrary amount I took out. But I included the 1099R in that return. Does that not take care of it? Seems like I already paid the taxes. I think what you are saying is that I still have to go back and take out the excess CONTRIBUTION ($530 +earnings). That (595)was just an early distribution, unqualified and the IRS already took out the taxes for 2004. Do I then file a 2nd 5329 with my 2005 return for the overlimit contri.? And how do I note that the institution took it out for the year 2004 not current? How do I get them to take out from 2004?

About the 2005 rollover. I am within 60 days. I still have possesion of the check from Scottrade. Can I still rollover? Just send that check back to Scottrade. I read up but got more confused. Seems like I cannot have possesion of the funds. And if I do then won't I still be over the contri. limit? I still have to take out $470 as an early distri. and claim on 2005 return as a 5329 excess contri. removal. Do I at least have that one down?

I can feel it. I almost understand. How the professionals keep this all straight is beyond me. But you all rock for sharing the info!

[Guest channel121]

Almost forgot. Yeah I would qualify for the exception for 2005 and 2004. I had education expenses in both years and medical bills in excess of 7.5% in 2005. So I could take an early distribution that would not be taxable b/c of the exceptions but still have to take out and pay on the excess contri.? Is an excess contri. removal still considered early distri and would not be taxable b/c of the exception? I think I am more confused than ever. Just alot of options. I am getting back all my taxes this year (Got terminated-got unemployment, tons of deductions/credits). So any tax penalty really wouldn't matter too much. I would still get it all back.

[Guest Fishchick]

You should be able to complete the 60-day rollover. You would just deposit the check from Scottrade into any IRA account, or you could deposit in your own checking account and write a check. (Sidenote: The rule about not taking possession of the funds has to do with rolling over from a Retirement Plan through your employer and whether or not taxes must be withheld.)

Then you would be starting from scratch on removing the excesses from your IRA account. To remove the 2004 excess, you would have to move really fast at this point, especially if it depends on you clearing the $595 deposit before taking the $ out.

If the $595 was just an arbitrary amount, I wouldn't say that it would qualify as excess plus earnings, but you might ask an accountant if it is close enough. There is a worksheet on page 27 (Worksheet 1-3) of IRS Pub 590 that explains how the earnings are calculated (it says it applies to recharacterizing a Roth contribution/conversion but the calculation is exactly the same).

[John G]

Wow, this sure has gotten to be messy and I am not sure I have followed all the money flows.

Just remember that your custodian(s) may be issuing reports to the IRS that might not jive with your view of the transactions. You really should talk to your custodian(s) about this problem and get a firm understanding of what will be reported.

Frankly, the IRS is not going to get very excited about the amount of money, tax or penalties involved in your case. BUT, those small messages sent by the custodian(s) to the IRS might trigger an IRS data request or audit.

I look on your circumstances as one of the reasons for keeping your IRA/Roth assets with one custodian.

Best wishes with your investments. There are not many folks still immersed in academic studies that have already jump started their long term Roth investing.

[Guest channel121]

Ok this is my plan:

1) 2004 early distribution of $595: reported distribution, paid (10% I guess) taxes, so it's over

2) 2004 excess contribution of $530 + earnings: Notified Roth custodian to take out excess + earnings for 2004. Was mailed 10/10/05; withdrawing the funds as an excess contribution.(Had to sell some of my shares so I could tranfer that money to the core account. I had to guess the amount + earnings, should be ok.) Have until 10/15 to have money taken out(crossing fingers!!)as excess. Exemption applies to 10% penalty on those earnings. Does this get filed with a 5329 with my 2005 tax return? How do I note the earnings and distribution for a previous year?!?

3) 2005 early distribution of $460: I have exemptions. File 2005 taxes with a 5329; reason for exemption is error on part of custodian in coding as a "J"(or non qualified) (medical/educational costs)

4) 2005 excess contribution: $470 + earnings. Notify custodian of excess like in #2

Have exemption for this amount as well(medical/educational costs). So 10% on earnings not applicable. But will file 5329 with exemption.

Can anyone clear these last few questions up? Or let me know if I am on the right track finally? Thanks for everyone's help so far.