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Excess Roth IRA Contributions for Prior Ten Years - What to Do

jofijohnjoseph
Level 4
New client comes to me with recognition he has made excess Roth IRA contributions (due to AGI) for previous TEN years. We can have TY 2020 contributions recharacterized as Traditional contributions, but that is not an option for prior years. How should I advise the client to handle the prior year contributions?
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6 Replies 6
linduca1216
Level 5

Similar situation, but (thank heavens!) not for that many years....

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JRC
Level 5

Advise to contact the Roth Administrator/Custodian to correct. 

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jofijohnjoseph
Level 4

I am asking from a tax perspective, e.g. how do we report all this?

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JRC
Level 5

Report nothing until they settle it with the custodial of the funds.

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qbteachmt
Level 15

"How should I advise the client to handle the prior year contributions?"

Read Pub 590A. And, I find that consumer articles work well for this:

https://www.investopedia.com/articles/retirement/04/042804.asp

https://www.thetaxadviser.com/issues/2020/apr/correcting-excess-contributions-iras.html

https://www.irahelp.com/forum-post/39031-calculation-earnings-excess-roth-ira-contributions-multiple...

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

 

There are many options, including allocating an earlier year's overage to the next year, etc, until it all gets "used up."

Your recharacterization is to nondeductible Traditional IRA, so you don't intend to amend any previous years?

There is a 6% tax and the excess for every year it was put into and left in the account, as well as tax every year on the earnings (prior earnings continue to be taxed, along with new earnings) until this all gets removed such as Corrective Distribution.

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jofijohnjoseph
Level 4

Correcting the excess Roth IRA contribution for TY 2020 is straightforward; you simply recharacterize the contribution to a Traditional IRA and file an amended return to this effect.

The problem is the client made excess Roth contributions for every year from TY 2011 thru TY 2020.  And the recharacterization option is ONLY available for the TY 2020 contributions.

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