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Excess Roth IRA contributions removed as normal distribution (not corrective distributions)

Forum|Forum|3 years ago
December 10, 2022
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I contributed $1500 directly to Roth IRA in 2022 (towards Year 2022) and then realized my income wont let me directly contribute to Roth IRA. So I removed it as a normal distribution and thought everything is fine. The other day I read that I should have removed it as corrective distribution, so I called my brokerage and they are saying that since it was done more than 6 months before, they can't change it. The amount I contributed was removed as is - no-earnings/no-loss. But I am worried that it will be reported in 1099-R as normal distribution, and that I also contributed $1500.

Now I am planning to contribute $6000 to traditional IRA that I am eligible to do for the year 2022, but will I be in a problem if I do so. Will the $1500 that I contributed be added to $6000 and then IRS will treat $1500 as excess?

I am not sure if the $1500 normal distribution from Roth IRA will nullify $1500 contribution to Roth IRA.

Any advice?

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Best answer by dmertz

A regular distribution in 2022 does not correct an excess contribution made for 2022.

If you contribute $6,000 to a traditional IRA, you will have made a total of $7,500 in total contributions, but when you make contributions to both a traditional IRA and a Roth IRA, the excess is deemed to be in the Roth IRA even if you were otherwise eligible to contribute to a Roth IRA, so you won't have an excess contribution to the traditional IRA. Since the $1,500 contributed to the Roth IRA is already an excess contribution, the contribution of $6,000 to the traditional IRA doesn't change anything with respect to excess contributions.

If in the past you have contributed more than $1,500 to the Roth IRA, your $1,500 distribution came from that contribution basis, making the distribution nontaxable. If after the $1,500 distribution you have no money in Roth IRAs, that distribution will have satisfied the requirement to remove the excess.

If there was no investment gain or loss in the entire Roth IRA account while the $1,500 was in the account, you could make the argument that the $1,500 distribution was the properly gain/loss adjusted amount distributed, but this would require explanation to the IRS. I don't know how the IRS would respond to this position. Even if there was investment gain or loss, you could possibly make the argument that this distribution constituted some amount of return of contribution adjusted for gain or the entire excess adjusted for loss plus some amount of regular distribution, but again, I don't know if the IRS would accept this position.

Employee

dmertzAnswer

Employee

A regular distribution in 2022 does not correct an excess contribution made for 2022.

If you contribute $6,000 to a traditional IRA, you will have made a total of $7,500 in total contributions, but when you make contributions to both a traditional IRA and a Roth IRA, the excess is deemed to be in the Roth IRA even if you were otherwise eligible to contribute to a Roth IRA, so you won't have an excess contribution to the traditional IRA. Since the $1,500 contributed to the Roth IRA is already an excess contribution, the contribution of $6,000 to the traditional IRA doesn't change anything with respect to excess contributions.

If in the past you have contributed more than $1,500 to the Roth IRA, your $1,500 distribution came from that contribution basis, making the distribution nontaxable. If after the $1,500 distribution you have no money in Roth IRAs, that distribution will have satisfied the requirement to remove the excess.

If there was no investment gain or loss in the entire Roth IRA account while the $1,500 was in the account, you could make the argument that the $1,500 distribution was the properly gain/loss adjusted amount distributed, but this would require explanation to the IRS. I don't know how the IRS would respond to this position. Even if there was investment gain or loss, you could possibly make the argument that this distribution constituted some amount of return of contribution adjusted for gain or the entire excess adjusted for loss plus some amount of regular distribution, but again, I don't know if the IRS would accept this position.

A

a_vAuthor

Thanks @dmertz. I called my brokerage firm to check my option on how we can correct this mistake, and here is what I learnt from them

1) I had no contribution to my Roth IRA in 2022 except for the $1500 contribution that I made - say on 03/01/2022

2) Then I took a regular distribution of $1500 on 03/15.

3) So now, there is no way for the brokerage account to correct it - either re-characterization to traditional or a corrective distribution. Because the money doesn't exist.

So, the safest option it seems is to - Contribute $4500 to Traditional in 2022. This way I am still under the max contribution of $6000. ($4500 + $1500)

So now, I contribute less in 2022 (I am okay with it), but I don't get penalized for the Roth contribution as an excess contribution. The distribution from Roth will not have any penalty, because we are talking about after-tax money throughout this thread.

@dmertz Do you see any issues with the above option?