dmertz
Level 15

Retirement tax questions

My comment about the penalty was in reference to what macuser_22 quoted from IRS Pub 590-A which is about leaving the excess contribution for 2019 unchanged, allowing the excess to carry over to 2020, then on your 2020 tax return applying the excess 2019 contribution as part of your 2020 contribution.  If you are able to switch the contribution to being one for 2020 (which can only be done before the deadline for making contributions for 2019 and only if the contribution for 2019 was made in 2020 as is the case here), there would be no contribution for 2019 that would be subject to penalty.

 

If the circumstances were such that you would not be able to have the custodian change the contribution to be a 2020 contribution (either if the contribution for 2019 was made in 2019 or the deadline for doing so had passed) and the Roth IRA saw substantial gains while the excess contribution was in the account, it can sometimes be advantageous to pay the 6% excess contribution penalty and apply the excess as part of the following year's contribution rather than obtain a return of contribution and be required to take out the gains which would be subject to tax and early-distribution penalty.  However, it's quite unlikely that you would have seen substantial gains in the short time that the contribution has been in the account in this case.