- The excess is subject to 6% exercise tax each year until distributed.
- The earnings are subject to tax as ordinary income “for the year in which the exess contribution was made.”1.
- The earnings are also subject to 10% early distribution penalty before 59 before December 29, 20222.
- You have up to the due date (including extension) to withdraw excess contribution plus earnings.
- After filing your return, you can still withdraw within 6 months “pursuant to section 301.9100-2”.
- If you have deducted the excess contribition, you need to amend the return not to deduct.
- Excess contribition can be absorbed by the allowed contribution limit next year.
- In 2022, James Bond contributed 5,000 to Roth IRA, all of which is an excess due to income limit.
- In 2023, He withdrew 5,000 plus earnings 200 before the filing deadline.
- In 2024, He will receive a 1099-R with a code P and 200 taxable income. He should have reported the income in advance on 2022 return using 1099-R code 8 or amend it afterwards.
- In 2019, Jack Ma (born September 10, 1964) made excess contribution 5000.
- In 2020, He made another excess contribution 6000.
- In 2021, In November, He withdrew 11,000 plus earnings 1,200.
Here are the consequences:
- In 2019, he will pay 5000 * 6% exercise tax.
- In 2020, he will pay (5000 + 6000) * 6% exercise tax.
- In 2021, he will pay regular tax and 10% early distribution penalty on 1200.
1 If you made an excess contribution in 2023 before the tax due date, even if that contribution was allocated to the 2022 tax year, any earnings from that excess contribution would be reported on your 2023 tax return. The language in IRC 408(d)(4)
In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.
indicates that the income should be reported in the year when it was actually earned, which is the year when the excess contribution happened.
2 Both Publication 590-A and Publication 590-B say “Beginning on or after December 29, 2022, the 10% additional tax will not apply to your withdrawal of interest or other income, if withdrawn on or before the due date (including extensions) of the income tax return.” The legislation indicates that the elimination of the additional tax on corrective distributions applies to any tax liabilities determined after the law has been enacted, even if the excess contribution (the “act” or “failure to act”) happened before the law was passed.