The Penalty for Failure to Pay a Roth IRA Excess Contribution
Both Roth IRAs and traditional IRAs have yearly contribution limits. As of 2011-12, Roth IRAs have contribution limits of $5,000 a year if you are under the age of 50. Those 50 and older have a contribution limit of $6,000 in a year. If contributing too much in a given tax year, you likely will face a penalty, although you have some ways of slipping by that.
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Excess Contribution Penalty
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A 6 percent excise tax penalty applies for any excess Roth IRA contribution through April of the tax year. The 6 percent penalty also applies if taking distributions throughout the year, while still having more than the allowance of $5,000 or $6,000. Contribution limits are the same for single people, married couples filing jointly and married couples filing separately.
Pulling Out an Excess Contribution
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An easy preventive to an excess contribution penalty is simply taking out your excess contribution before October of the tax year. Nevertheless, it’s also an early distribution for a Roth IRA, which still means a 10 percent penalty and tax. Exceptions include if the IRA has been active for at least five years or if you are at least 59 1/2 years old.
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Re-characterize a Roth IRA
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A re-characterizing of your Roth IRA into a traditional IRA is also a good deterrent to an excessive contribution penalty. This means transferring the excess contribution amount from one IRA to another. Your Roth IRA administrator is available for discussing the re-characterizing procedure. Have him transfer your Roth IRA excess contribution into a traditional IRA by Oct. 15 of the tax year.
Fill Out Form 8606
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Your administrator will also help you in filling out Internal Revenue Service Form 8606 for documentation of your IRA re-characterization. This form is called "Nondeductible IRAs" and has four parts. (See Resources) In Part I, list your nondeductible contributions to your Roth IRA. For Part II, list any IRA conversions. Part III is for information on rolling over your Roth IRA into a traditional IRA. Then, in Part IV, provide your distributions from all IRAs. When filing, attach this to your 1040 form.
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References
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