Roth IRA Excess Contributions

[dylantfwc]

I accidentally contributed to a Roth IRA over the past 3 years while being over the income limit. Below are my total contributions:

2021 - $6,000

2022 - $6,000

2023 - $6,500

The current value of the account is just over $13,000, reflecting a loss of roughly ~5,500. How do I handle this since everywhere I check describes a situation where the account has gains, not losses. The cost basis of my investment is well above the current value.

[Anonymous_]

I'll page @dmertz 

[dylantfwc]

This is the response I got on reddit. Is this correct?

[dylantfwc]

@Anonymous_ @dmertz See above screenshots

[fanfare]

To resolve the first two years you must remove $6,000 each, or offset it with an allowed contribution.

Evidently you don't have any allowed contribution(s).

To resolve the third year you must remove the remaining money if that is less than $6,500.

You owe penalties of 6% yearly on money that should not be in your Roth IRA when it is a disallowed contribution that was not timely resolved.

@dylantfwc .

[dylantfwc]

@fanfare So I'd pay a 6% penalty on $6,000 and then 6% on $12,000? The fact that by year end 2021 the value was less than $6000 and by year end 2022 the value was significantly less than $12,000?

[fanfare]

After the due date of the tax return, the penalty is on your excess contribution remaining after distributions, which was $6,000 and 12000.

The penalty for 2023 will be zero if you get all the money out by year end.

The lower year end value in 2021 or 2022 doesn't help you because you took no disitrbution in those years.

@dylantfwc 

[dylantfwc]

Ok so I file form 5329 for 2021 and pay 6% of $6,000. Then I file form 5329 for 2022 and pay 6% of $12,000 and that's it? No other paperwork required?

@fanfare 

[dylantfwc]

In addition to the above I request a withdrawal of excess contribution from Fidelity for the remaining monies over $12,000 which won't be penalized?

@fanfare 

[fanfare]

yuo still have to do a 2023 Form 5329 for the remainder but the penalty will be zero if account is empty.

@dylantfwc 

[dylantfwc]

@fanfare Ok I already did the request for excess contributions. Should I just have withdrew the entire balance instead and did a form for 2023 like you say. Or am I ok doing the request of excess contributions and then file the form on top of that?

[fanfare]

Because your Roth lost so much value I expect that  there are no positive earnings attributable to your 2023 excess contribution. The custodian should return everything.

But, if you start by asking for the most recent contribution first, you will get back $6500, plus any earnings.

@dmertz 

@dylantfwc 

[dmertz]

I didn't respond previously for this vary reason.  Assuming that this is the only Roth IRA, it's not clear how the amounts returned are to be allocated to the various excess contributions given that the balance is less than the amount of the excess contributions.  Taking a distribution of the entire amount will reduce the penalty to zero since the penalty based on the lesser of excess or the year-end balance.

[fanfare]

2023 is different since it is not after the due date of your 2023 return.

so it will depend on whether the custodian's calculation is positive or negative.

@dylantfwc 

@dmertz 

[fanfare]

It appears that taking it all in one shot is the preferable and simplest way.

@dylantfwc