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Old 01-30-2013, 12:48 AM
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Excessive Roth IRA Contribution

I incorrectly contributed around 3k in excess to my Roth IRA account in 2011 (Only had one W-2 with income of around 60k). I did not withdraw/transfer this amount in time as I did not know about the 5k limit to Roth IRA contributions. In 2012, I also contributed around 3k in excess to my Roth IRA Account. I understand I can get the 2012 excess to roll over or withdraw w/o penalty, as it is still before the filing deadline. However, for my 2011 excess, will I get penalized the 6% for both 2011 and 2012? Do I have to file an amended 2011 form? Any other tips to handle this situation?

Thank you.



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Old 01-30-2013, 01:47 AM
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“However, for my 2011 excess, will I get penalized the 6% for both 2011 and 2012?”====>Ye s. correct; whatever the reason may be, a penalty tax will apply if you don't take action to correct an excess contribution. Asyousaid,this is a 6% tax you're required to pay each year the excess contribution remains uncorrected, 2011 and 2012 in this case. For example, suppose you made a $8K contribution to a Roth IRA early in 2011, then got a larger bonus than you expected and found that due to the income limitation your permitted contribution was only $5K. Your excess contribution was $3K If you didn't correct the excess contribution for 2011, you had to pay $180 excess contribution tax (6% of $3K). And if you left the problem uncorrected beyond the end of 2011, you owe another $180. You'll continue to owe this tax each year until you correct the excess contribution.ALSOThis tax can easily be 100%, or even more than 100%, of the amount of investment income generated by this excess amount in a year.
“ Do I have to file an amended 2011 form? Any other tips to handle this situation?”====>If you want to keep the over contribution in the R- IRA and use it as a deemed contribution for 2012, then, all you need to do is amend your 2011 tax return and pay the 6% excise tax on the $3K overcontribution. At this point there is no way to avoid the excise tax. You do not have to pay tax on the earnings if you leave the entire contribution and earnings in your account and use it as a deemed 2012 contribution as iassuem that you qualify for the R-IRA contribution. You do not take a distribution and the recontribute it, that would trigger tax and penalty on the earnings. ALSO, you only have until Oct 15 if you, prior to Apr 15, filed for an extension. Otherwise, your return was due April 15. If You contributed more than you were entitled to in 2011. then You cannot recharacterize the excess contributions you made in 2011 after April 15, 2012, because contributions after that date are no longer timely for 2011. You can contact the financial institution acting as trustee for your Roth IRA for more info in detail.



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