Excess Roth Contribution

[zeros]

Clients put in $4000 each in a Roth IRA in 2006. Their income is $163,000 so no contribution is allowed. They plan to take it out plus earnings. I understand that the earnings plus 10% penalty would have to be reported on the 06 return. What form is used to report this?

Also, is there no income limit in an IRA? Can everyone have one? I would understand that only those within the income levels could deduct it.

[GIMoe]

Form

What form is used to report this?

5329 is used to report this.

[Roland Slugg]

Roth IRA

I understand that the earnings plus 10% penalty would have to be reported on the 06 return.

If your clients withdraw the excess contribution (and earnings thereon) by April 17, 2007 there is no penalty and no reporting.

Also, is there no income limit in an IRA?

No, there is no income limit for a contributory IRA.

Can everyone have one?

There is an upper age limit of 70-1/2 for deducting contributions to an IRA.

[zeros]

Att: Roland

I have seen on other posts that the earnings in this case, indeed, would be taxable even though the unauthorized contribution was withdrawn by the due date.

I have one situation pending. Are you absolutely sure that no reporting is required?

[Bill Tubbs]

Earnings are taxable

If your clients withdraw the excess contribution (and earnings thereon) by April 17, 2007 there is no penalty and no reporting.

The original excess contribution if removed by the due date (including extensions) is basically then considered not to have happened at all -- if the earnings on said amount are also taken out. While the excess contribution is not reported, the earnings are taxable income:

Pub 590 (for 2006), pg 62, right column, under "Withdrawl of excess contributions":
"The earnings are considered earned and received in the year the excess contribution was made"

Bill

[Dervis]

Earnings

Of course the earnings are taxable. Plus there is a 10% penalty on early withdrawal of the earnings. This is all explained in the instructions to form 8606 and reporting requirements in Pub. 590.