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Is a 2019 excess Roth IRA contribution that was made before 2019 due date and was withdrawn by 2020 due date subject to the 6% excise tax?

RANDYBLANK
Level 3
Client made a 2019 excess Roth IRA contribution on 02/15/2020 (which is prior to the 2019 July 15, 2020 due date).  The excess contribution will be withdrawn prior to the 2020 May 17, 2021 due date.  Client states that agent at Fidelity assures him that since he is withdrawing the excess 2019 contribution (contributed in 2020) before the due date for the tax year in which he made the contribution (2020)  that the 2019 excess contribution will not be subject to the 6% excise tax. I can find no authority for this position. Any input you can offer on this subject will be appreciated.
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qbteachmt
Level 15

Putting in money for the Tax Year you are not eligible, and then not taking it out by the due date of the same Tax Year's return, is the problem.

Putting it in in 2020 for 2019, means it had to be taken out by the filing date of the 2019 return, to be "as if it never happened."

"(if you’ve already filed): You can avoid the 6% penalty if you remove the excess contribution and earnings and file an amended return by the October extension deadline."

That would be October 2020, for tax year 2019. We missed that deadline.

"The excess contribution will be withdrawn prior to the 2020 May 17, 2021 due date."

Remove it, or apply it forward. That's the future tax year of 2021. You reported it was done for 2019. It is being removed in 2021. Or, one option for corrective action is to have it applied to 2020. "Doing this on a future tax return" (your client will have this on the 2020 return) "won’t get you off the hook for the 6% tax this year, but at least you’ll stop paying once you apply the excess."

"Client states that agent at Fidelity assures him that since he is withdrawing the excess 2019 contribution (contributed in 2020)"

In vs For.

"before the due date for the tax year in which he made the contribution (2020)"

Now you are confusing Year made In and Year of Contribution. Made it in is 2020, but is FOR year 2019. "If you fund a Roth IRA in April 2021 for the calendar year of 2020, the five-year rule starts as of Jan. 1, 2020." See how that makes a difference?

"that the 2019 excess contribution will not be subject to the 6% excise tax."

Well, at least one of these years has already passed, in reality. So that clearly is an erroneous statement.

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

 

*******************************
"Level Up" is a gaming function, not a real life function.

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qbteachmt
Level 15

Putting in money for the Tax Year you are not eligible, and then not taking it out by the due date of the same Tax Year's return, is the problem.

Putting it in in 2020 for 2019, means it had to be taken out by the filing date of the 2019 return, to be "as if it never happened."

"(if you’ve already filed): You can avoid the 6% penalty if you remove the excess contribution and earnings and file an amended return by the October extension deadline."

That would be October 2020, for tax year 2019. We missed that deadline.

"The excess contribution will be withdrawn prior to the 2020 May 17, 2021 due date."

Remove it, or apply it forward. That's the future tax year of 2021. You reported it was done for 2019. It is being removed in 2021. Or, one option for corrective action is to have it applied to 2020. "Doing this on a future tax return" (your client will have this on the 2020 return) "won’t get you off the hook for the 6% tax this year, but at least you’ll stop paying once you apply the excess."

"Client states that agent at Fidelity assures him that since he is withdrawing the excess 2019 contribution (contributed in 2020)"

In vs For.

"before the due date for the tax year in which he made the contribution (2020)"

Now you are confusing Year made In and Year of Contribution. Made it in is 2020, but is FOR year 2019. "If you fund a Roth IRA in April 2021 for the calendar year of 2020, the five-year rule starts as of Jan. 1, 2020." See how that makes a difference?

"that the 2019 excess contribution will not be subject to the 6% excise tax."

Well, at least one of these years has already passed, in reality. So that clearly is an erroneous statement.

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

 

*******************************
"Level Up" is a gaming function, not a real life function.

View solution in original post

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