Excess contributions to a Roth IRA, including improper conversion amounts (i.e., nonqualified rollover contributions) and failed conversions, are subject to a nondeductible 6 percent excise tax until the excess is corrected. No matter what the reason, contributing beyond the IRS limit could trigger a tax penalty if you don’t take steps to handle the excess. There are various ways you could find yourself with an excess contribution to a Roth IRA
For Roth IRA purposes, excess contributions are the sum of:
1. Contributions in excess of the amount allowed as a regular contribution to a Roth IRA, plus
2. Excess Roth IRA contributions for the preceding tax year, reduced by:
a. Roth IRA distributions for the preceding tax year, plus
b. The excess, if any, of the maximum allowable Roth IRA contribution over the amount actually contributed by the individual to all individual retirement plans for the tax year.
Qualified rollover contribution to a Roth IRA
A qualified rollover contribution to a Roth IRA is not taken into account for purposes of determining whether there are excess Roth IRA contributions that are subject to the 6 percent excise tax.
Common Examples of Excess IRA Contributions
There are several types of transactions that can create excess contributions in a Roth IRA. These include:
- Making regular Roth IRA contributions in excess of the contribution limit in effect for the year
- Rolling over amounts that are not rollover-eligible.
- Making a Roth IRA conversion when one is ineligible to do so
Form 5329 and Excess IRA Contributions
The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes, later in Pub. 590-A. If your total IRA contributions (both Traditional and Roth combined) are greater than the allowed amount for the year in your situation, and you have not withdrawn the excess contributions, you must complete Form 5329 to calculate a 6% penalty tax on the excess contribution. This penalty tax will continue to be assessed every year on ALL excess contributions (those from prior years along with any in the current year) until you withdraw the excess contributions.
Making a Corrective Distribution from Roth IRA
If an excess Roth IRA contribution is distributed, together with allocable income, before the due date (plus extensions) of the taxpayer’s tax return for the tax year in which the excess contributions were made, the excess is treated as though the contribution had never been made. Because a corrective distribution of excess Roth IRA contributions represents a return of nondeductible contributions, the distribution is not includable in the taxpayer’s gross income.
Fixing Over Contributions to Roth IRA
The allocable income that is distributed, on the other hand, is includable in the taxpayer’s gross income for the tax year in which the excess contribution is made. Aggregate excess contributions that are not distributed from the Roth IRA on or before the due date (with extensions) of the individual’s tax return for the tax year of the contribution are reduced as a deemed Roth IRA contribution for each subsequent tax year to the extent the Roth IRA owner does not actually make regular Roth IRA contributions for such years.
Excess contributions to a Roth IRA Penalty
Remember, this tax can easily be 100%, or even more than 100%, of the amount of investment income generated by this excess amount in a year. It’s important to correct an excess contribution.