Pay 6% excise tax on Roth excess contribution with Huge Tesla Gains Versus Removal

[cstudiostax]

I over contributed 11,995 to my IRA for 2019 and 2020 in July of 2020 after having contributed to the ROTH limit -- I didn't know the 7000 dollar limit was across both the Standard IRA and the Roth -- dummy me

To make things more interesting, I did a Roth Conversion which was basically the 11955 with some growth.

The good news is I bought stocks in Tsla, and it grew 5x, so I'd rather pay the excise tax each year, and roll half of the 11,995 for 2022, and the next half for 2023.

In any case I have a questions for you all:

1. Is the 6% excise tax on the contribution only or the entire Roth account?

2. If I decide to take out the excess contribution,  I found I need to take the excess contribution itself plus the growth.  Using the equation below, I have come up with 31,263.00 distribution.  Is the equation correct?

Adjusted Opening Balance: The previous IRA balance plus all contributions (including the excess one), consolidations, and transfers into the account since the contribution occurred.

Adjusted Closing Balance: The current value of the IRA minus all distributions, consolidations, and transfers since the contribution occurred.

   Net income = excess contribution × (ACB−AOB)/ AOB

   31263.25     = 11955.00 * (168130.00 - (34553.00 + 11955.00))  /  (34,553.00 + 11,955)

    Adjusted Closing Balance (ACB): 168,130.00

               Initial Balance: 34,553.00 

               Excess: 11,955.00

 Adjusted Opening Balance (AOB): 34,553.00  + 11,955.00

                              Taxable amount:  19,308.25 = 31263.25 - 11,955.00

3.  Is the taxable amount correct -- meaning the removal of the contribution from the total removed from the Roth IRA account?

4.  If so, my taxes would be 19,308.25 * .24 = 4633.97, or is there also a 10% penalty?   if so then 6564.80 in Taxes!!!

So pay 6% * 11,955.00 = 717.30 for 2021 and 2022, and 6% * 4955 = 297.30 for 2023  for a total of 1731.90 and keep the TSLA gains, or pay 4633.97 to 6564.80 in taxes and loose all the gains.

5.  Do I pay taxes on the Roth conversion and the excise tax or distribution tax (depending which route I go with)? Even if I go with the removal of excess? since basically the Roth conversion is the excess?

6.  To me paying the excise tax seems like a better solution.  I'm I missing something?

[fanfare]

you pay 6% per year on the excess contribution not the Roth value.

Please wait one year.

After one year, when you remove an excess contribution, the earnings on that money will remain in the Roth IRA.

[dmertz]

To avoid another 6% penalty for 2021, the regular distribution suggested by fanfare needs to be made after October 15, 2021 and no later than December 31, 2021.

[cstudiostax]

Thanks for the answer!

So for April 15th 2021,  I would just submit my taxes without extra forms correct?

Then after October, I could take the excess amount out, and then I would have to amend the 2020 and 2019 tax returns to indicate the removal.  Is this the correct?

Also, do I pay taxes on the Roth Conversion + Taxes on the Removal + 10%?

[dmertz · Accepted solution]

No, not correct.

If not already included, you'll need to amend your 2019 tax return to include Form 5329 Part IV to report and pay the excess contribution made for 2019.  That's it for 2019.

Your 2020 tax return will include Form 5329 Part IV to report the excess contribution carried in from 2019, to add the excess contribution made for 2020 and calculate and pay the 6% excess contribution penalty on the combined total of $11,995.  That's it for 2020.

On your 2021 tax return you report the regular distribution of $11,995. This distribution will appear on Form 8606 as a nontaxable distribution of contribution basis.  It will also appear on Form 5329 Part IV to show that the $11,995 excess carried in from 2020 is reduced to zero by the $11,995 distribution, leaving you with no penalty for 2021.

[cstudiostax]

Fantastic,

Thanks again for the great detailed info!  

Just to make sure, since I do have a 2020 1099-R showing the Roth Conversion, do I need to do I report anything on that since it did have 3000 in gains prior to the conversion?

[dmertz]

The Roth conversion of the separate amount from the traditional IRA in 2020 needs to be reported on the 2020 tax return.  My earlier reply only addressed the excess contributions to the Roth IRA.