Question about calculating "earnings" on excess of contributions to IRA

Forum|Forum|3 years ago
December 24, 2022
13 replies
74 views

Hello, I have an issue with excess of contributions to an IRA. Can you let me understand if I have these calculations correct.

Assume, I have a total of $11,000 of excess contributions to Roth IRA, with account balance starting at $0. There was one deposit of $10,000 and a later $5,000 deposit (all after-tax money; it is from Roth 401k). Assuming no other appreciation/growth/etc. I am using the Net Income Attributable formula (I think this is the right formula to use?), one example here: https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf.

So my starting account balance is $10,000, and the ending balance is $15,000. That means I have to pay taxes on 11000 * (15000-10000)/10000 = 5500. So if I am doing this correctly, I am paying another $5,500 of taxes (despite zero actual growth since it is all from contributions)? If so, is this tough luck, don't do this again in the future? Thanks.

Not A Product Question

NCperson

Level 15

@xilex - is this excess from 2021 or 2022 tax year?

xilexAuthor

Level 3

Sorry, neglected to mention that. This is excess for 2022 year. And the limit I refer to is the $61,000 from employer/employee contributions to a 401k plan.

NCperson

Level 15

@xilex - then I am confused by your ask - look at #1 in the link you provided

1. Timely remove excess before the tax filing deadline
— The excess or unwanted IRA contribution amount,
plus the net gain or loss, will need to be removed by the tax
filing deadline (generally April 15), including an automatic
six month extension. This means the excess should
generally be distributed by October 15. If you remove the
excess contribution after you file your taxes, you may need
to file an amended tax return. If you remove the excess in
a timely manner, you will owe tax and, if under age 59½,
the IRS 10% additional tax for early or pre-59½ distributions
(10% additional tax) on any earnings, not on the excess
contribution. See the next page for the IRS provided
formula for calculating the Net Income Attributable (NIA)
of either earnings or losses.

dmertz

Level 15

You are calculating incorrectly. Your Adjusted Opening Balance is $15,000, not $10,000.

xilexAuthor

Level 3

Why would it be $15,000? Because on the date of the first overcontribution it is $10,000.

@NCperson

My issue is they (broker, Fidelity in this case) have computed a positive earnings based on the formula. On the first date of excess contribution, the account balance was $10,000 (w/the contribution), and then there was another $5,000 contribution. Then on the date of return of excess contribution the account balance was $15,000. So based on NIA formula, I end up having earnings because this account has gained $5,000 overall. Am I incorrect?

dmertz

Level 15

Read the definition of AOB in the reference you provided or in CFR 1.408-11. The $5,000 deposited later, but prior to the return of contribution, must be added to the $10,000 originally contributed. By not accounting for that $5,000 in the AOB, the $5,000 is treated as investment gain (which it is not).