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poshlost
New Member

So I apparently have $118,300 gross. I put $5500 in a Roth which was rolled over 2x w/ 50% return. How in the world do I calculate the overpayment amount or pull it out?

The 50% return is for the entire Roth account. I have no idea how to assign the capital gains to the $5500 2017 contribution portion. Is it better to pay the 6% overpayment fee or just withdraw it, and how much do I use as the basis/withdraw? This is only $300 past the income limit; maybe the IRS will let it slide?

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Accepted Solutions
dmertz
Level 15

So I apparently have $118,300 gross. I put $5500 in a Roth which was rolled over 2x w/ 50% return. How in the world do I calculate the overpayment amount or pull it out?

Except for the possibility of this being treated as a de minimis error, no the IRS will not let it slide.  However, because penalties accumulate each year that the excess remains in the account, the total will eventually be large enough that the IRS might not treat it as a de minimis error.

A modified AGI of $118,300 puts you 2% of the way into the $118,000 to $133,000 phase-out range for single filers.  Assuming that you are under age 50, this makes 2% of $5,500 or $110 and excess contribution to your Roth IRA, subject to a 6%, $7 penalty unless the excess is removed by a return of contribution.  However, because of the gains while in the Roth IRA, the gains on the excess would also have to be removed, subject to a 10% early-distribution penalty and ordinary income tax, adding to your modified AGI, and increasing the amount of your excess contribution, the amount that must be returned, the amount of gains that must be distributed and the tax and penalty that msut be paid.  The amount will eventually converge.

Because the gains are substantial, it would be cheaper to pay the 6% penalty for 2017 than to pay the early-distribution penalty and tax on the gains.  You can leave the excess in, pay the $7 penalty with your 2017 tax return, then either apply the $110 excess as a contribution from 2018, if you are eligible for a 2018 Roth IRA contribution, or make a regular distribution of $110 in 2018 after October 15 but before the end of 2018 (otherwise you'll have another $7 penalty for 2018).  Paying the excess contribution penalty and the requirement to distribute earnings are mutually exclusive.

I hope that when you say that the Roth IRA was rolled over 2 times that you do not actually mean distribution, paid to you, then rolled over to another Roth IRA of back to the same Roth IRA within 60 days.  That would be a violation of the one-rollover-per-12-months rule.  I assume that you mean either that the investment within the Roth IRA was rolled over or that you moved the Roth IRA by nonreportable trustee-to-trustee transfer.  In either case you should not receive a 2017 Form 1099-R showing a distribution nor should you receive a 2017 Form 5498 showing a rollover contribution.

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3 Replies
dmertz
Level 15

So I apparently have $118,300 gross. I put $5500 in a Roth which was rolled over 2x w/ 50% return. How in the world do I calculate the overpayment amount or pull it out?

Except for the possibility of this being treated as a de minimis error, no the IRS will not let it slide.  However, because penalties accumulate each year that the excess remains in the account, the total will eventually be large enough that the IRS might not treat it as a de minimis error.

A modified AGI of $118,300 puts you 2% of the way into the $118,000 to $133,000 phase-out range for single filers.  Assuming that you are under age 50, this makes 2% of $5,500 or $110 and excess contribution to your Roth IRA, subject to a 6%, $7 penalty unless the excess is removed by a return of contribution.  However, because of the gains while in the Roth IRA, the gains on the excess would also have to be removed, subject to a 10% early-distribution penalty and ordinary income tax, adding to your modified AGI, and increasing the amount of your excess contribution, the amount that must be returned, the amount of gains that must be distributed and the tax and penalty that msut be paid.  The amount will eventually converge.

Because the gains are substantial, it would be cheaper to pay the 6% penalty for 2017 than to pay the early-distribution penalty and tax on the gains.  You can leave the excess in, pay the $7 penalty with your 2017 tax return, then either apply the $110 excess as a contribution from 2018, if you are eligible for a 2018 Roth IRA contribution, or make a regular distribution of $110 in 2018 after October 15 but before the end of 2018 (otherwise you'll have another $7 penalty for 2018).  Paying the excess contribution penalty and the requirement to distribute earnings are mutually exclusive.

I hope that when you say that the Roth IRA was rolled over 2 times that you do not actually mean distribution, paid to you, then rolled over to another Roth IRA of back to the same Roth IRA within 60 days.  That would be a violation of the one-rollover-per-12-months rule.  I assume that you mean either that the investment within the Roth IRA was rolled over or that you moved the Roth IRA by nonreportable trustee-to-trustee transfer.  In either case you should not receive a 2017 Form 1099-R showing a distribution nor should you receive a 2017 Form 5498 showing a rollover contribution.

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poshlost
New Member

So I apparently have $118,300 gross. I put $5500 in a Roth which was rolled over 2x w/ 50% return. How in the world do I calculate the overpayment amount or pull it out?

Thanks for your assistance! To clarify, you only have to pay the 6% on the excess, not on the gains from the excess?
dmertz
Level 15

So I apparently have $118,300 gross. I put $5500 in a Roth which was rolled over 2x w/ 50% return. How in the world do I calculate the overpayment amount or pull it out?

Correct.  Gains on the excess contributions are not themselves excess contributions.  TurboTax will automatically calculate your excess contribution as $110 and the penalty for 2017 as $7 (rounded up from $6.60).
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