Roth IRA: I contributed too much. Now what?

February 24, 2006 10:16 AM

Tax Attorney Filter: I contributed too much to my Roth IRA 3 years in a row. Should I be worried?

After reading financial advice articles, it seemed wise to open up a Roth IRA and dump in the maximum every year as early as possible, so I started in '03, and have made 3 maximum contributions for '03, '04, and '05. I did this using money in an investment account I had when I was a kid and got control of when I turned 18.

However, I'm a student, and make effectively no money. After deductions, I made $319 in '05, which is apparently the maximum I can contribute to my Roth IRA for '05. My accountant suggested I ask my broker to roll my 2005 contribution (minus $319) over to 2006. When I asked about the previous 2 years of apparently illegal contributions, he said that he had never encountered this situation, and has no idea. He doesn't know whether the IRS really has any record of IRA contributions.

Do I have anything to worry about here? If so, what should I do? If not, do I even need to roll the '05 contribution over to '06?

posted by sdis to work & money (6 comments total)

The IRS does keep records of this sort of thing, most definitely; however, you don't fit the profile of a serious tax cheat so you probably won't get busted for it. IANATL, so I'm not sure if you have anything to worry about, but rolling it into future years may be a good thing - but really, isn't this what you pay an accountant for? Shouldn't s/he know about these sorts of things?

You have an accountant AND a broker while you're a student? Man, things sure have changed since I was a student. :-)
posted by pdb at 10:38 AM on February 24, 2006

Excess Annual Contributions
posted by probablysteve at 10:52 AM on February 24, 2006

IAAL, and my recommendation is to see one.
posted by Ironmouth at 10:57 AM on February 24, 2006

Looks like you owe 6% for every year it's in there.
posted by kindall at 11:13 AM on February 24, 2006

Yes, the IRS knows about IRA contributions. If your tax advisor doesn't know that, then honestly he's not much of a tax advisor, because he should know that your bank/brokerage is required by law to provide a form 5498 to you by, I believe, May 31 of each year, which shows all contributions for the previous tax year through the filing deadline (April 15, usually, of the current tax year).

So, step number one, get a new tax advisor, because the one you've got apparently can't advise his way out of a paper bag. You need to withdraw the excess. If this started in 2003, the IRS is about to start catching up to you because (in my experience) they're perpetually anywhere from two to three years behind with this stuff. While you are not a "big violator" you are an individual tax payer and not a business or business owner, and you are therefore more likely to get caught just because it's easier to tell where you messed up. If you called me at my bank and told me what you said here, I would tell you that I am 99% sure that you are going to have to withdraw the excess in the accounts above your earned income for any particular year/contribution, and that you should seek competent tax advice now.
posted by Medieval Maven at 4:54 PM on February 24, 2006

That's a great link by probablysteve. To build on it, option 2, recharcterization, isn't available to you, because "You must also have earned income (compensation) in order to contribute to a Traditional IRA."

Bottom line: you owe the IRS the 6% penalties. What you have to worry about is if you don't fix the problem now (by withdrawing the excess), you'll owe even larger penalties in the future.
posted by WestCoaster at 9:32 PM on February 24, 2006