Excess IRA contribution


V

Vigo

I just found out that my son contributed about $200 more to his Roth IRA
than he was allowed to in 2007. What must he do to avoid a penalty? Can he
ask the Roth IRA custodian to recharacterize $200 of his contributions
toward his 2008 contribution?

If there is a penalty, is that paid on his 2007 return? I assume he will pay
tax, if any, on the earnings on the excess contributions on his 2008 return.
 
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B

Benjamin Yazersky CPA

I just found out that my son contributed about $200 more to his Roth IRA
than he was allowed to in 2007. What must he do to avoid a penalty? Can he
ask the Roth IRA custodian to recharacterize $200 of his contributions
toward his 2008 contribution?

If there is a penalty, is that paid on his 2007 return? I assume he will pay
tax, if any, on the earnings on the excess contributions on his 2008 return.

--

Withdraw the excess before you file your tax return


___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----



"This written advice was not intended or written to be used, and it
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P

Phil Marti

Vigo said:
I just found out that my son contributed about $200 more to his Roth IRA
than he was allowed to in 2007.
Exactly what made the $200 excess? It affects his options.
 
V

Vigo

Phil Marti said:
Exactly what made the $200 excess? It affects his options.
He deposited what he made from his summer job ($3050) but when his W-2
arrived, Box 1 was $193 less because of contributions to a 401(k). He
forgot that that amount was non-taxable and shouldn't have been counted as
earnings when figuring how much he could contribute to his Roth.

If he removes the excess before Apr. 15, does that avoid the penalty but
still subject him to taxes on the earnings on that $193?
 
P

Phil Marti

He deposited what he made from his summer job ($3050) but when his W-2
arrived, Box 1 was $193 less because of contributions to a 401(k). He
forgot that that amount was non-taxable and shouldn't have been counted as
earnings when figuring how much he could contribute to his Roth.
Thanks for the clarification, and congratulations on raising such a
sensible, forward-looking son. Here are his options:

1. Withdraw the $193 and the earnings on it by the due date of his 2007
return. The earnings will be 2007 income even though paid out in 2008.
Because of his standard deduction, it's likely that he still will pay no
income tax for 2007. The earnings would be subject to a 10% premature
distribution penalty. Unless he's a brilliant stock picker, it's likely
that the penalty will be negligible. (BUT, see below.)

2. Assuming he anticipates at least $193 of earned income in 2008, he can
do nothing. He would owe a $12 penalty even though he still pays no income
tax. He then reduces his allowable 2008 contribution by $193. No notice to
or action by the Roth custodian is necessary.

On the surface it looks like withdrawal is the obvious choice. Before doing
so, find out the amount of any fee the custodian would charge. If that fee
is more than $12, he's better off with option 2.
 
V

Vigo

Thanks for the clarification, and congratulations on raising such a
sensible, forward-looking son. Here are his options:

1. Withdraw the $193 and the earnings on it by the due date of his 2007
return. The earnings will be 2007 income even though paid out in 2008.
Because of his standard deduction, it's likely that he still will pay no
income tax for 2007. The earnings would be subject to a 10% premature
distribution penalty. Unless he's a brilliant stock picker, it's likely
that the penalty will be negligible. (BUT, see below.)

2. Assuming he anticipates at least $193 of earned income in 2008, he can
do nothing. He would owe a $12 penalty even though he still pays no
income tax. He then reduces his allowable 2008 contribution by $193. No
notice to or action by the Roth custodian is necessary.

On the surface it looks like withdrawal is the obvious choice. Before
doing so, find out the amount of any fee the custodian would charge. If
that fee is more than $12, he's better off with option 2.
Thanks, Phil. I think he'll choose option 1. Vanguard doesn't charge a fee
for the transaction.

Appreciate your help!
 
V

Vigo

Phil Marti said:
Thanks for the clarification, and congratulations on raising such a
sensible, forward-looking son. Here are his options:

1. Withdraw the $193 and the earnings on it by the due date of his 2007
return. The earnings will be 2007 income even though paid out in 2008.
Because of his standard deduction, it's likely that he still will pay no
income tax for 2007. The earnings would be subject to a 10% premature
distribution penalty. Unless he's a brilliant stock picker, it's likely
that the penalty will be negligible. (BUT, see below.)

2. Assuming he anticipates at least $193 of earned income in 2008, he can
do nothing. He would owe a $12 penalty even though he still pays no
income tax. He then reduces his allowable 2008 contribution by $193. No
notice to or action by the Roth custodian is necessary.

On the surface it looks like withdrawal is the obvious choice. Before
doing so, find out the amount of any fee the custodian would charge. If
that fee is more than $12, he's better off with option 2.
Phil, I hope you won't mind a follow up on this situation . I'd like to
clarify something now that my son has withdrawn the excess.

He withdrew the $193 but there were no earnings, instead there was a loss of
$16.26. So Vanguard has reported his excess distribution as $176.74. He
asked them to put this amount toward his 2008 contribution. He will not owe
the 6% penalty since he withdrew the excess before April 15, and he won't
have a 10% premature distribution penalty on the earnings since there
weren't any, correct? And his 2007 IRA contribution is considered to be
$3050 (wages) less $193 (excess contribution), for a total of $2857, is that
right?

Many thanks for your help!
 
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P

Phil Marti

He withdrew the $193 but there were no earnings, instead there was a loss
of $16.26. So Vanguard has reported his excess distribution as $176.74. He
asked them to put this amount toward his 2008 contribution. He will not
owe the 6% penalty since he withdrew the excess before April 15, and he
won't have a 10% premature distribution penalty on the earnings since
there weren't any, correct? And his 2007 IRA contribution is considered to
be $3050 (wages) less $193 (excess contribution), for a total of $2857, is
that right?
Correct.
 

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