Hi all. I’m planning to call my institution on Monday during regular hours for their advice and course of action, but wanted to get a better understanding beforehand so I know how to work with my new CPA and institution to resolve my mistake.
For the years of 2021-2025 I made excess contributions to a Roth IRA due to some miscommunication and misinterpretation of the language from my old CPA. Long story short, I contributed the following despite my incoming being either above the upper limit or within the reduced contributions limit:
2021: $6,000
2022: $4,000
2023: $6,000
2024: $6,000
2025: $7,000
Account was opened in 2020, with contributions made to 2019 and 2020 that were appropriately converted.
—
Now for the year of 2025 since I will have this recharacterized as a traditional IRA before the deadline, I have that scratched off the list.
The catch is though, although those contributions are to a Roth IRA, they were already filed for those years as if they were a traditional IRA for those years.
After reading through this post, my understanding is that I would:
-
Remove all of the excess contributions, leaving the gains. (I’m not going to calculate my partial contributions and all, I’m just going to take them all out to simplify this as much as possible)
-
I’ll need to pay the 6% penalties on the past years. (Assuming I’m taking out all of my contribution, which totals to $3240)
-
I’ll need to pay taxes on capital gains for those years. (TBD after speaking with my institution)
-
I’ll need to file an amendment each of the four years, including the originally listed traditional IRA contributions, capital gains, etc.
However, since those Roth IRA contributions were already filed as if they were traditional contributions, is there anything else that I would have to note when making my amendments? It seems like a 1040-X will need to be done to make that adjustment but that would only be for up to 3 years from the filing date if I’m understanding this correctly.
TIA for any insight on this, I’m trying to wrap my head around all of this to assess the damage and see how I should communicate this between my CPA and institution.
Excess Roth contribution with a twist
byu/willerz2 inpersonalfinance
Posted by willerz2
1 Comment
>The catch is though, although those contributions are to a Roth IRA, they were already filed for those years as if they were a traditional IRA for those years.
Where did you falsely report these contributions for these years (2021-2024)? Schedule 1 (deducted IRA) or Form 8606 (nondeducted IRA)?
>Remove all of the excess contributions, leaving the gains.
Then don’t use the word “Remove”. Use “Distribute” or “Withdraw” to avoid confusion.
>I’ll need to pay taxes on capital gains for those years
The concept of capital gain tax does not apply to tax advantaged accounts.
In fact, there is no tax at all except the 6% penalty. Essentially, keeping an overdue excess contribution is the same as betting whether the investments do better or worse than the 6% penalty rate.