IRA Excess Contributions from A to Z

IRA Excess Contributions from A to Z

Learning Objectives Define an excess contribution Identify excess contribution correction methods Calculate NIA to an excess contribution List the possible taxes and penalty taxes for excess contributions 2

Types of Excess Contributions True Excess Deemed Excess Excess Contributions 3

Traditional IRA Contribution exceeds individual limit Contribution exceeds earned income Contribution for age 70½ year or later True Excess Roth IRA Contribution exceeds individual limit Contribution exceeds earned income IRA owner exceeds modified adjusted gross income (MAGI) limit 4

Filing Status 2018 MAGI Limits for Regular Roth IRA Contributions MAGI for Full Contribution MAGI for Partial Contribution Ineligible for Roth Contribution Single Up to $120,000 $120,000 up to $135,000 Over $135,000 Married, filing jointly Up to $189,000 $189,000 up to $199,000 Over $199,000 Married, filing separately N/A $0 up to $10,000 Over $10,000 5

Deemed Excess Eligible current-year contribution IRA owner removes eligible amount with NIA by deadline Cannot deem as excess after tax return due date, plus extensions 6

True Versus Deemed Excess I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. I was told by my tax advisor that I didn t have enough compensation. I would like to remove the extra $3,000. What type of excess is this? TRUE EXCESS DEEMED EXCESS 7

True Versus Deemed Excess I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What type of excess is this? TRUE EXCESS DEEMED EXCESS 8

Deadline to Correct an Excess Contribution 1/1 12/31 4/15 10/15 Contribution year Deadline to recharacterize or remove an excess if tax return is not filed on time Deadline to recharacterize or remove an excess if tax return is filed on time 9

Deadline to Correct an Excess Contribution I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. What is my deadline to remove the excess contribution? October 15, 2018 10

Deadline to Correct an Excess Contribution I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What is the deadline to remove the contribution? October 15, 2019 11

BEFORE AFTER Recharacterize (if eligible) with NIA or Remove any contribution with NIA Is the contribution a true excess? YES Carry forward (i.e., redesignate) or Remove excess contribution NO Remains an annual contribution (deductible or nondeductible) 12

Correcting Excess Contributions Before the Deadline Earnings NIA Excess Contribution IRA 13

NIA Calculation NIA = Contribution x Total Earnings Adjusted Opening Balance Calculated on IRA containing excess contribution Distributed from that IRA Based on overall value of all investments in IRA 14

NIA = Contribution x Total Earnings Adjusted Opening Balance Adjusted Closing Balance Adjusted Opening Balance Any penalty 15

NIA Exercise Page 7 16

Beginning Balance + Contributions during computation period = Adjusted Opening Balance $41,758.21 + $5,500 = $47,258.21 17

Ending Balance + Distributions during computation period = Adjusted Closing Balance $47,437.72 + $0 = $47,437.72 18

Adjusted Closing - Adjusted - Any = Total Opening Penalty Earnings Balance Balance $47,437.72 - - $47,258.21 $0 = $179.51 19

NIA = Contribution x Total Earnings Adjusted Opening Balance $11.39 = $3,000 x $47,258.21 $179.51 20

Excess Correction Before Deadline Remove excess contribution Remove NIA Do not claim excess as deductible or nondeductible contribution on tax return Claim NIA as taxable income in year excess was made NIA may be subject to 10% early distribution penalty tax 21

3011.39 Box 1 = Gross distribution amount, includes excess contribution plus NIA 22

3011.39 11.39 Box 2a = NIA only 23

3011.39 11.39 Box 7 = Code 8 or P with code 1 or J as required Mark the IRA/SEP/SIMPLE box for Traditional IRA 24

Code P (Use code 1, 4, or J when applicable) Current-year contribution Contribution removed by 10/15 2017 2018 25

Code 8 (Use code 1, 4, or J when applicable) Current-year contribution Contribution removed 2017 2018 Prior-year contribution Contribution removed by 10/15 2017 2018 26

Reporting Excess Contributions Removed Before the Deadline Page 11 27

REDLINE FINANCIAL 29 PATH PLAZA JERSEY CITY, NJ 07306 6522.18 22.18 99-8888888 999-88-9999 ARTHUR GROSSMAN 14627 SYLVAN ST. VAN NUYS, CA 91411 8 X 28

Excess Correction After Deadline Tax return due date 4/15 For calendar-year filer who timely files, no later than six months after the tax return due date 10/15 Contribution Year Following Year Correct Only True Excess Carry forward (i.e., redesignate) Remove 29

BEFORE AFTER Recharacterize (if eligible) with NIA or Remove any contribution with NIA Is the contribution a true excess? YES Carry forward (i.e., redesignate) or Remove excess contribution NO Remains an annual contribution (deductible or nondeductible) 30

Leave contribution in IRA Carry Forward (i.e., redesignate) Leave NIA in IRA Pay 6% penalty tax IRA owner carries forward on tax return Reported on Form 5498 for year made for 31

2015 $22,000 contribution = $5,500 eligible contribution and $16,500 excess contribution (6% penalty on $16,500) 2017 $11,000 carried forward = $5,500 eligible contribution and $5,500 excess contribution (6% penalty on $5,500) 2016 $16,500 carried forward = $5,500 eligible contribution and $11,000 excess contribution (6% penalty on $11,000) 2018 $5,500 carried forward = $5,500 eligible contribution and $0 excess contribution (no 6% penalty) 32

Excess Contribution After Deadline Contributions less than or equal to annual limit Contributions greater than annual limit Remove excess Leave NIA Pay 6% penalty tax Remove excess (taxable) Leave NIA Pay 6% penalty tax Pay 10% penalty tax (if applicable) 33

Employer-sponsored retirement plan Invalid rollover IRA IRA owner may withdraw without tax or penalty tax Excess contribution 34

Box 1 = Enter the total distribution amount 35

Box 2a = Leave blank 36

Box 2b = Check the Taxable amount not determined box 37

Box 7 = Traditional IRA: Code 1 or 7 Roth IRA: Code T, Q, or J 38

Questions?

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