What if contribute too much into IRA accounts

Forum|Forum|5 years ago
October 24, 2020
1 reply
40 views

Just making an example,

Assumption: In July 2020, I contributed $1000 in traditional IRA for year 2020 & $5000 in Roth IRA 2020, at that point, my income allows me to contribute up to $6000.

But for individual brokerage account: if I sell some stock in December 2020 and claim capital gain for year 2020, which will actually cause me not qualified for IRA contribution.

Above assumption applies to both below two cases:

1) IRA accounts also have capital gain, what will happen to the IRA accounts (I actually should not contribute due to income limit, but I have already made the contribution in July)?

2) Both IRA accounts lost money or lost all the money (wiped out when option trading), what will happen to the IRA accounts? I should not contribute to IRA in July but I have already made the contribution, but I cannot take any money out of IRA since I lost everything in IRA accounts.

Thanks.

Not A Product Question

Best answer by dmertz

If you close your Roth IRA any excess contribution penalty should dissolve also. Right, @dmertz ?

Depends on whether or not this Roth IRA is the only Roth IRA. If this is the only Roth IRA, it is entirely distributed and it has lost value since relative to that immediately after making the contribution, there would be excess contribution penalty since the penalty is based on the lesser of the amount of the excess contribution and the year-end balance in Roth IRAs.

To resolve the excess contribution properly, you could as the Roth IRA custodian to recharacterize the Roth IRA contribution to be a traditional IRA contribution instead, resulting in the custodian transferring to a traditional IRA the the amount of the contribution adjusted for investment losses, or by requesting a return of contribution from the Roth IRA, resulting in the loss-adjusted amount being distributed to you without any penalty (since there are no taxable gains attributable to the contribution).

If the Roth IRA currently has a $0 value, a recharacterization would accomplish nothing, but a return of contribution would make sense with a loss-adjusted distribution of $0 reported on a code J8 2020 Form 1099-R if done in 2020.

I'm not sure how a Roth IRA with a $0 value could receive any capital gains. The investment performance must be calculated over the entire Roth IRA, so if the Roth IRA does not have a $0 value because the value include more than what was attributable to the $5,000 contribution for 2020, the recharacterization or return of contribution could have either a gain or loss depending on overall investment performance.

Contributing more makes no sense at all.

fanfare

Level 15

You can work off your "excess" by ensuring that your Contribution next year is less than the max allowable,
particularly by the amount of your excess. Then your penalty situation will be resolved, using Form 5329.
if you are eligible next year to contribute 6000, or (some amount) you can apply that amount to resolving your excess and you don't have to take the 6000 out. see Form 5329.

VAerAuthor

Level 6

What happen if I never have chance to make Roth IRA contribution anymore? E.g. I will be promoted and salary is increased a lot, OR brokerage account becomes big & I expect some capital gain from stock market every year, make me unqualified for Roth IRA contribution anymore