Earning from a Roth access contribution

Forum|Forum|5 years ago
March 11, 2021
1 reply
8 views

My son contributed the max $6.0k to his Roth in 2020, he now learned that his income is too high for the contribution. Such contribution has earned ~$3.0k in earnings. Schwab said he needs to withdraw both the $6.0 and the earnings. Our question is about the earnings, can he roll that over into a Rollover IRA and avoid paying tax and possible 10% penalty? Or is he better off, paying the tax+penalty and keeping the cash? Big thanks to all for your input.

Best answer by macuser_22

@Clidinho wrote:

My son contributed the max $6.0k to his Roth in 2020, he now learned that his income is too high for the contribution. Such contribution has earned ~$3.0k in earnings. Schwab said he needs to withdraw both the $6.0 and the earnings. Our question is about the earnings, can he roll that over into a Rollover IRA and avoid paying tax and possible 10% penalty? Or is he better off, paying the tax+penalty and keeping the cash? Big thanks to all for your input.

Rollover no. He can either have the contribution returned to him as a "return of contribution plus earnings" or he can have it recharactorized to a Traditional IRA contribution. Both the contribution and earnings will be moved to the Traditional IRA as if the Roth contribution never happened and the contribution was to the Traditional IRA instead. Either one must be done by the IRA custodian.

macuser_22

Answer

Alumni - Champ

@Clidinho wrote:

My son contributed the max $6.0k to his Roth in 2020, he now learned that his income is too high for the contribution. Such contribution has earned ~$3.0k in earnings. Schwab said he needs to withdraw both the $6.0 and the earnings. Our question is about the earnings, can he roll that over into a Rollover IRA and avoid paying tax and possible 10% penalty? Or is he better off, paying the tax+penalty and keeping the cash? Big thanks to all for your input.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

wmct

Level 2

Hello,

Your information is really useful. I was in similar situation where the money was returned to me in the same year 2020 after I found out that I didn't qualify for Roth IRA. The 1099 R form Fidelity sent me has a distribution code J(early distribution from Roth IRA) Shouldn't they give me a code P (return of contribution taxable in 2019) instead?

macuser_22

Alumni - Champ

@wmct wrote:

Hello,

Your information is really useful. I was in similar situation where the money was returned to me in the same year 2020 after I found out that I didn't qualify for Roth IRA. The 1099 R form Fidelity sent me has a distribution code J(early distribution from Roth IRA) Shouldn't they give me a code P (return of contribution taxable in 2019) instead?

That depends of you just asked for a regular distribution of the money or a "return of contribution" plus earnings. An ordinary distribution will have a code J, a return of contribution will have a code PJ. A code PJ is taxable in a 2019 tax return and code J in taxable in 2020. A code PJ eliminates the 6% 2019 excess contribution penalty, a code J means you must fie a 2019 5329 form with the 6% penalty.

Perhaps the financial institution sim-understood and needs to issue a corrected 1099-R.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**