How to Avoid the Roth IRA Excess Contribution Excise Tax

By Shani Valdez

  • Overview

    There are various reasons as to why excess Roth contributions occur. A failed conversion may have taken place with an ineligible rollover. A Required Minimum Distribution (RMD) was ineligibly converted. AGI and modified AGI income levels were higher than previously thought when you made your contribution or conversion. Or, maybe you're married and filed separately during conversion. Regardless of how it happened, the excess must be corrected in order to avoid the 6 percent excess contribution excise tax, which is taxed every year the excess remains in the Roth.
    How to Avoid the Roth IRA Excess Contribution Excise Tax
  • Correcting your excess contribution

    • Step 1

      Review IRS publication 590 online (see resources below) to be current on statutory income thresholds for contributions and conversions. Determine what your eligible contribution limit is or whether you meet conversion requirements.

    • Step 2

      Decide which withdrawal method is most appropriate for you. You can do an early distribution, recharacterization or redesignate your Roth to a traditional IRA. If unsure about which method is most suitable for you, consult with your tax adviser to determine the best correction method.
    • Step 3

      Report earned income on line 15 of your 1040 to pay taxes on your taxable distribution if doing an early withdrawal. Excess contributions and earned income must be withdrawn by your tax-filing deadline, including any extensions. If under age 59 ½ and unable to qualify for an early withdrawal exception, your earned income will be subject to a 10 percent early withdrawal penalty.
    • Step 4

      Recharacterize your excess if you want to avoid the early withdrawal and excise tax penalties entirely. Download and fill out your IRA administrator's recharacterization form.
    • Step 5

      Open an traditional IRA account before doing a recharacterization if you don't already have one. Your IRA administrator can provide you with the appropriate IRA forms via mail or online. Fill out the recharacterization form with your new account information to start the transfer process.Your recharacterized excess will be treated as a traditional IRA contribution.
    • Skill: Moderately Easy
    • Ingredients:
    • Publication 590
    • Recharacterization/traditional IRA account forms
    • Tip: Consider reconversion for your recharacterization. The MAGI threshold will be repealed starting next year, which means there will be no MAGI income requirements for any conversions.

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