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IRA Excess Contributions from A to Z
Learning Objectives
Define an excess contributionIdentify excess contribution correction methodsCalculate NIA to an excess contributionList the possible taxes and penalty taxes for excess contributions
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Excess Contributions
TrueExcess
Deemed Excess
Types of Excess Contributions
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True ExcessTraditional IRA Roth IRA
• Contribution exceeds individual limit
• Contribution exceeds earned income
• Contribution for age 70½ year or later
• Contribution exceeds individual limit
• Contribution exceeds earned income
• IRA owner exceeds modified adjusted gross income (MAGI) limit
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2018 MAGI Limits for Regular Roth IRA Contributions
Filing Status MAGI for Full Contribution
MAGI for Partial Contribution
Ineligible for Roth Contribution
Single Up to $120,000 $120,000 up to $135,000 Over $135,000
Married, filing jointly Up to $189,000 $189,000 up to $199,000 Over $199,000
Married, filing separately N/A $0 up to $10,000 Over $10,000
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Deemed Excess• Eligible current-year contribution• IRA owner removes eligible amount with NIA by deadline• Cannot deem as excess after tax return due date, plus extensions
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True Versus Deemed Excess
I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. I was told by my tax advisor that I didn’t have enough compensation. I would like to remove the extra $3,000. What type of excess is this?
TRUE EXCESS
DEEMED EXCESS
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True Versus Deemed Excess
I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What type of excess is this?
TRUE EXCESS
DEEMED EXCESS
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1/1 12/31
Contribution year
4/15 10/15
Deadline to recharacterize or
remove an excess if tax return
is filed on time
Deadline to recharacterize or
remove an excessif tax return is not filed
on time
Deadline to Correct an Excess Contribution
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Deadline to Correct an Excess Contribution
I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. What is my deadline to remove the excess contribution?
October 15, 2018
10
Deadline to Correct an Excess Contribution
I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What is the deadline to remove the contribution?
October 15, 2019
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BEFORE
• Recharacterize (if eligible) with NIAor
• Remove any contribution with NIA
Is the contribution a true excess?
YES
• Carry forward (i.e., redesignate)or
• Remove excess contribution
AFTER
NO
• Remains an annual contribution (deductible or nondeductible)
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IRA
Excess Contribution
Earnings NIA
Correcting Excess Contributions Before the Deadline
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Contribution x Total EarningsAdjusted Opening Balance
NIA =
• Calculated on IRA containing excess contribution
• Distributed from that IRA• Based on overall value of all
investments in IRA
NIA Calculation
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Contribution x Total EarningsAdjusted Opening BalanceNIA =
Adjusted Opening Balance
Adjusted Closing Balance
Any penalty
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NIA Exercise
7Page
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Beginning Balance
Contributions during
computation period
+ Adjusted Opening Balance
=
$41,758.21 $5,500+ $47,258.21=
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Ending Balance
Distributions during
computation period
+ Adjusted Closing Balance
=
$47,437.72 $0+ $47,437.72=
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$47,437.72 - $179.51=$47,258.21 $0-
Adjusted Closing Balance
- Total Earnings=
Adjusted Opening Balance
Any Penalty-
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$3,000 x$11.39 = $179.51$47,258.21
Contribution xNIA = Total Earnings
Adjusted Opening Balance
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Excess Correction Before Deadline• Remove excess contribution• Remove NIA• Do not claim excess as deductible or nondeductible
contribution on tax return• Claim NIA as taxable income in year excess was made• NIA may be subject to 10% early distribution penalty tax
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Box 1 = Gross distribution amount, includes excess contribution plus NIA
3011.39
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3011.39
Box 2a = NIA only
11.39
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3011.39
11.39
Box 7 = Code 8 or P with code 1 or J as requiredMark the IRA/SEP/SIMPLE box for Traditional IRA
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Current-year contribution
2017 2018
Code P (Use code 1, 4, or J when applicable)
Contribution removed by 10/15
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Prior-year contribution
Current-year contribution
Contribution removed
2017 2018
2017 2018
Contribution removed by 10/15
Code 8 (Use code 1, 4, or J when applicable)
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Reporting Excess Contributions Removed Before the Deadline
Page 11
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6522.18REDLINE FINANCIAL29 PATH PLAZAJERSEY CITY, NJ 07306
99-8888888 999-88-9999
ARTHUR GROSSMAN
14627 SYLVAN ST.
VAN NUYS, CA 91411
22.18
8 X
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Excess Correction After Deadline
Correct Only True Excess
• Carry forward (i.e., redesignate)
• Remove
Contribution Year Following Year
Tax return due date
4/15
For calendar-year filer who timely files, no later
than six months after the tax return due date
10/15
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BEFORE
• Recharacterize (if eligible) with NIAor
• Remove any contribution with NIA
Is the contribution a true excess?
YES
• Carry forward (i.e., redesignate)or
• Remove excess contribution
AFTER
NO
• Remains an annual contribution (deductible or nondeductible)
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Pay 6% penalty tax
Leave contribution in IRA
Leave NIA in IRA
IRA owner carries forward on tax return
Reported on Form 5498 for year made for
Carry Forward (i.e., redesignate)
2015$22,000 contribution
=$5,500 eligible contribution
and$16,500 excess contribution
(6% penalty on $16,500)
2016$16,500 carried forward
=$5,500 eligible contribution
and$11,000 excess contribution
(6% penalty on $11,000)
2017$11,000 carried forward
=$5,500 eligible contribution
and$5,500 excess contribution
(6% penalty on $5,500)
2018$5,500 carried forward
=$5,500 eligible contribution
and$0 excess contribution
(no 6% penalty)
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Excess Contribution After DeadlineContributions less than or equal to
annual limitContributions greater than
annual limit
• Remove excess• Leave NIA• Pay 6% penalty tax
• Remove excess (taxable)• Leave NIA• Pay 6% penalty tax• Pay 10% penalty tax
(if applicable)
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Excess contribution
IRA
IRA owner may withdraw without tax or penalty tax
Invalid rolloverEmployer-sponsoredretirement plan
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Box 1 = Enter the total distribution amount
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Box 2a = Leave blank
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Box 2b = Check the Taxable amount not determined box
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Box 7 = Traditional IRA: Code 1 or 7Roth IRA: Code T, Q, or J
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Questions?
Thank you for attending
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IRA Excess Contributions from A to Z
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