Roth distribution - need a sanity check

[kamckinley]

Hi Everyone. I need a sanity check on a Roth IRA distribution. Here are the details:

Client made Roth IRA contributions for many years (basis well over $20,000). Then in 2015, her income was too high and she unknowingly made excess contributions. Error wasn't caught until 2018. Schwab said she couldn't remove excess contributions from 2015, that it would be treated as a 2018 distribution (client is under 59 1/2 so early distribution, no known exception).

Fast forward to today... the 1099R that she received shows $6,150 in box 1, nothing in box 2, code J in box 7. Originally, I was thinking the earnings (above the amount she contributed in 2015, approx $1,250) would be taxable. However, now I'm thinking that if this is being treated as an early Roth distribution for 2018, then none of the distribution should be taxable because her basis is well over the distribution amount.

Am I correct that none of the amount would be taxable? FYI, 5329 was filed and penalties have already been paid on the excess contributions for 2015, 2016 and 2017. I'm just trying to report the 1099R received for 2018.

Thank you!

[kathyc2]

Was her income too high in 16,17 and 18 to make any Roth contribution? If not, you can apply the excess from 2015 to any of those years. If every year was too high you have two options:

1) Count the 2018 distribution as return of contribution and no tax. However, the 6% penalty will continue to be accessed each year.
2) Have the earning portion subject to tax and penalty to eliminate the 5329 going forward.

[kamckinley]

Was her income too high in 16,17 and 18 to make any Roth contribution? If not, you can apply the excess from 2015 to any of those years. If every year was too high you have two options:

1) Count the 2018 distribution as return of contribution and no tax. However, the 6% penalty will continue to be accessed each year.
2) Have the earning portion subject to tax and penalty to eliminate the 5329 going forward.

Yes, her income was too high in all of those years. We have already reported the excess contributions on Form 5329 and she has paid the penalty for those years. Just trying to deal with the 2018 distribution. I believe it should be treated as return of contribution, but just wanted to make sure, this has been a mess!

[Anarchrist]

Why didn't you request a waiver of penalties? Never pay the penalties until they deny the waiver request and they rarely deny a request in this type of situation.

[kamckinley]

Why didn't you request a waiver of penalties? Never pay the penalties until they deny the waiver request and they rarely deny a request in this type of situation.

I agree with you. We did request waiver of the penalties, but the client didn't want to wait for a response, so they paid them with the filing of the 5329 forms. Not only did the IRS not waive the penalties, they sent them a bill for interest! It doesn't appear that the IRS is as lenient with excess Roth or IRA contributions as they are with missed RMDs.

Thanks for the responses, I appreciate it.