Roth IRA contributions being taxed

[dbdd3]

My daughter lives abroad but she's a US citizen and pays US taxes.  She began contributing to a Roth IRA in 2019.  She contributed $900 in 2019 but in TT it says she overpaid by $900 and she's being taxed on the $900.  Is this accurate? Thank you. 

[SusanY1 · Accepted solution]

I don't have enough information to know for sure. If she didn't qualify for the contribution (by having too little or too much income) then there is a 6% excise tax on the excess amount, unless it is withdrawn by April 15, 2020.

If she uses the Foreign Earned Income Exclusion (FEIE) to exclude her overseas income, that may make her ineligible to make the Roth contribution as the adjustment for this exclusion reduces Adjusted Gross Income (AGI) upon which the contribution amount is based. 

She may be eligible to make the contribution if she uses the Foreign Tax Credit method to reduce her taxes on her overseas income instead (assuming she pays taxes to another country on the same income.) However, if she has used the FEIE in the past, switching to the foreign tax credit method revokes that election and she is unable to use the FEIE for five years so special care should be taken if switching to this method. 

[dbdd3]

Thank you very much for your response.  You are correct re: the FEIE.  However, technically she is not ineligible to make contributions, but rather she will just have to pay the overpayment penalty, correct?

[dmertz]

"However, technically she is not ineligible to make contributions, but rather she will just have to pay the overpayment penalty, correct?"

No, that's not correct.  She is ineligible to make the contribution if the foreign-earned income is excluded and she has no other compensation to support the contribution, as appears to be the case.  She will be subject to a 6% excess-contribution penalty each year that the money remains in the account.  Also, if this was her first Roth IRA contribution, an excess contribution does not start the 5-year clock for determining qualified distributions.  to avoid a penalty every year she must obtain a return of the excess contribution.