Advanced Underwriting Consultants

Question of the Day – March 14

Ask the Experts!

Here’s the question of the day.

Question: I have a client who contributed to a Roth IRA in 2011, but has actually earned too much to make a contribution.  Can the taxpayer simply apply the 2011 contribution to calendar year 2012—in which she will be eligible to make a Roth contribution—without penalty?

Answer: No.

It is possible to apply an excess contribution from an earlier year to the current year without taking a distribution.  This method allows the taxpayer to avoid making a distribution, but it does not avoid the 6% tax on excess contributions remaining at the end of the year and reduces the maximum contribution for the current year.

Here’s an example adapted from Publication 590:

Teri was entitled to contribute $1,000 to an IRA in 2011 and will be entitled to contribute $1,500 for 2010.  She actually contributed $1,400 in 2011.  $400 is an excess contribution for 2011 and will be subject to the 6% excise tax unless withdrawn prior to April 15, 2012.  Teri chooses not to make a withdrawal, and therefore owes an excise tax of $24 for the excess contribution.  In order to avoid the 6% penalty tax for 2012, Teri can treat the $400 excess contribution as a 2012 contribution.  That is, as long as her additional contributions for 2012 are less than $1,100 ($1,500 – $400), the $400 excess contribution for 2011 will be treated as a 2012 contribution and she will not have to take a withdrawal.

If a taxpayer does not make a corrective distribution, a 6% penalty tax will be imposed on the excessive amount, for the current year and for every subsequent year, until the excess contribution is eliminated.

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