turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Roth IRA: Calculate earning on excess contribution

If anyone could help me with my questions it is really appreciated!

 

I have contributed too much to my Roth IRA account 2019 and am going to fix it. I run into some problems with calculating the earnings.
I contributed $5500 for 2018 and $6000 for 2019 in Jan 2019. In the year 2018 I still had a job and $5500 contribution is within the limit. I quit my job in 2019 and have to remove the excess contribution of $6000 and also its earnings.

 

The formula I am using:
Net Income=Contribution×(Adjusted Closing Balance−Adjusted Opening Balance)/Adjusted Opening Balance.

 

x = amount in my Roth IRA account 1.1.2019

 

For the AOB, is it x+5500 or x+5500+6000?

 

In Dec 2019 I moved money from my Tradition IRA to Roth IRA. Could you confirm this is NOT an excess contribution? There is no excess contribution in Trad IRA.

 

How do I calculate ACB in this case with the additional non-excess contribution in Roth IRA?

x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

7 Replies
dmertz
Level 15

Roth IRA: Calculate earning on excess contribution

Assuming no intervening movement of money into or out of the Roth IRA account:

 

The Adjusted Opening Balance is the balance immediately following the $6,000 contribution.  That would be the balance on the date of these contributions prior to the contributions plus $11,500.  (But see below since you did add to the Roth IRA during the computation period).

 

The Adjusted Closing Balance is the balance in the account immediately prior to the return of contribution distribution.

 

What you are calculating the the rate of gain or loss while the contribution being returned was in the account, then applying that rate to the contribution being returned.  If the account gained 10%, the account contains $600 of earnings on the $6,000 being returned.

 

However, in your case you moved an additional amount into your Roth IRA as the result of a Roth conversion during the computation period.  In calculating your Adjusted Opening Balance you must add this amount (since it's also present in the Adjusted Closing Balance).  So your AOB will be the balance immediately following the contributions for 2018 and 2019 plus the amount of your Roth conversion.

 

See CFR 1.408-11 for all of the details of the calculations:

https://www.law.cornell.edu/cfr/text/26/1.408-11

 

Your IRA custodian should be doing the attributable-earnings calculation for you when you explicitly request a return of contribution form your Roth IRA before the due date of your tax return.  If your Roth IRA balance changes daily in an unpredictable way such as when your Roth IRA is invested in stocks, mutual funds or ETFs, you won't have the current balance needed do the calculation on the date of the distribution.  The account balance needed to do the calculation will not be determined until after you have to request the distribution, so the custodian needs to do the calculation.

dmertz
Level 15

Roth IRA: Calculate earning on excess contribution

I've added to my answer to account for the fact that in December 2019 you did a Roth conversion into this Roth IRA.

Anonymous
Not applicable

Roth IRA: Calculate earning on excess contribution

Similar situation please help, 

Just got done doing my taxes and realize I've exceeded my IRA contributions for 2019.  I made the full limit deposit in January 2019. To make it more challenging, unknowingly I deposited again the full 2020 limit on January 2020. So, how do I calculate the Net Income and amount that I need to take out? How do I include the  2020 contribution in my calculations?

 

1/15/2019 $6,000 deposit.

1/29/2020 $6,000 deposit.

2019 Taxes filed 3/11/2020

Actual Excess= $1,364.  Rounded to $1,500.

On my 2019 taxes I rounded up and said I will be withdrawing $1500.

 

Thank you, 

dmertz
Level 15

Roth IRA: Calculate earning on excess contribution

BW737, was your contribution made in January 2020 made for 2020 or for 2019?  If you told the IRA custodian that the January 2020 contribution was for 2019, can you ask your IRA custodian to change the designation of that contribution to be a contribution for 2020 instead of for 2019?

 

Assuming that the January 2020 contribution was made for 2020, that $6,000 addition will factor into the calculation of any earnings required to be distributed with the return of the excess $1,346 contribution for 2019.  The earnings will add to your 2019 modified AGI and would increase the amount of excess contribution that needs to be returned.  CFR 1.408-11 describes how to add your $6,000 January 2020 contribution in determining the adjusted opening balance for the calculation of the earnings attributable to your excess contribution made for 2019.

Anonymous
Not applicable

Roth IRA: Calculate earning on excess contribution

Thanks for the reply, 

 

1/15/2019 $6,000 deposit=>for 2019

1/29/2020 $6,000 deposit=>for 2020

 

I will try to calculate best I can, but I would like to have a professional take a look at it. Any recommendations?

Thanks, 

Roth IRA: Calculate earning on excess contribution

you  really want the custodian to do the calculation for you and send you the money.

Problem one, the earnings change from day to day.

Problem two, taking out more beyond the earnings would be an early withdrawal subject to penalty tax.

Problem three the calculation is complex and you'd likely make an error.

Problem four, you'd get the wrong 1099 distribution code and have to explain to the IRS what you did.

dmertz
Level 15

Roth IRA: Calculate earning on excess contribution

fanfare, the issue is that when one is in the phase out range for a Roth IRA contribution and there have been investment gains, one needs to do the calculation to figure out how much needs to be returned since the earnings will add to AGI and change the amount of the excess.  That's not a calculation the custodian can do for you.  Of course once you do know the amount that needs to be returned, at least pretty closely, one needs to request that amount to be returned and the custodian will do the actual earnings calculation to determine the amount of the distribution.  For investments that vary from day to day it might be a good idea to request a little extra be returned, although any small amount of excess that might remain can be handled by paying the 6% penalty on that small amount and taking a regular distribution of that amount to eliminate the excess.

Unlock tailored help options in your account.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question