Hi All,
For background, I have an individual and Roth IRA account with TD Ameritrade.
For 2020, I contributed $12k as opposed to the $6k annual limit to my Roth IRA. Unfortunately, I used up 100% of those funds to buy stocks.
What ways/methods do I have to minimize/avoid the penalty?
Thanks in advance
You will have to tell your bank to withdraw the excess contribution (plus any earnings) by the due date otherwise you will pay a 6% penalty per year for each year the excess amounts remain in the IRA.
Or you could accept and pay the penalty this year and apply the excess amount to your 2021 contribution, if you haven't contributed anything in 2021 yet. If you consider doing this, just be sure that you will be able to apply the excess as a 2021 Roth IRA contribution so that you do not incur additional penalties on this excess. You will enter the this on your 2021 return.
Please be aware your Roth IRA contribution may be limited based on your filing status and income:
Dana,
According to the IRS (Roth) link, if a single person makes over > $140,000, their contribution should be $0. Does this suggest any contributed amount >$0 is considered an excess and is hit w/ the 6% penalty?
Yes, in 2020 if a persons modified adjusted gross income (MAGI) is equal or more than $139,000 ($140,000 is the 2021 limit) then you cannot contribute anything to the Roth IRA and any amount contributed would be excess contribution and hit with the 6% penalty.
But you can still contribute to a traditional IRA (depending on your income and if you are covered by a retirement plan this might not be deductible). If you want you can make it nondeductible so you can convert it later to a Roth IRA and won't have to pay taxes on the nondeductible part (basis). This is called backdoor Roth IRA conversion.
Please see How do I enter a backdoor Roth IRA conversion? for additional information.
So, going back to my original issue with the excess Roth IRA contributions...if that excess for example is 6k, bought stocks now with gains, I have the ability to move 6k worth of stocks into my Individual account. Would that work to avoid the penalty?
To avoid penalty with a "return of contribution" distribution any earnings attributed to the excess must also be returned. You can sell the stock withing the IRA and distribute the contribution amount plus earnings or remove a "like kind" amount of stock equal to that amount.
As an alternative if there has been a lot of gain that exceeds 6% of the excess, then you can delay removing the excess (not the earnings) until after the extended due date (Oct 15, 2021) and just pay the 6% penalty now with the 2020 tax return. If you pay the 6% penalty then the earnings can stay in the account.
Thank you, everyone for your responses.
I called TD Ameritrade and they're having me fill out a form to reverse the excess contributions. In my situation, I get to choose which stocks (worth up to the excess amount) and it'll be moved to my Individual account. No penalties of any sort.