# Accidental over-contribution to ROTH

I just discovered that I have accidentally made over contributions to a ROTH at an old brokerage (I’d believed I’d closed all accounts, but they left one account open with automatic monthly contributions that I just discovered). I calculated the overage as a little over \$3,000 spread over the last 4 years and am feeling pretty dumb. The brokerage apologized and has now fully closed the account and transferred the money back.

How do I best go about making this right, tax-wise?

I understand there is a 6% penalty for over- contributions left in a ROTH and would be inclined to simply pay a <\$200 fee to be done with it (the funds were never invested), but now that the brokerage actually sent me the funds, I’m even more confused.

Thanks in advance for any thoughts or guidance!

So, first you need to figure, by year, how much was over-contributed.

It’s a 6% penalty per year - which is why you need to figure the over-contributions by year. See IRS Pub 590-A p590a.pdf (irs.gov)

For example, if it was \$750 in 2020, \$750 in 2021, \$750 in 2022 and \$750 in 2023, then the excess tax you would owe would be:
\$750 * 0.06 = \$45 for 2020
\$1500 * 0.06 = \$90 for 2021
\$2250 * 0.06 = \$135 for 2022

Since you had the \$750 for 2023 returned to you before the due date for your 2023 return, you don’t have to pay the 6% tax on that, so the excess tax for 2023 would be:
\$2250 * 0.06 = \$135

So the total in excess taxes in this case would be \$45 + \$90 + \$135 + \$135 = \$405

You will need to fill out Form 5329 (Excess Roth contributions go in part IV) f5329.pdf (irs.gov) for each year there were excess contributions in your Roth IRA, and file an amended return for each of those years.

If there were any earnings, those earnings should have also been returned to you, and will need to be accounted for as income on your amended returns. You will need to account for the earnings on each year’s excess contribution on the amended return for that year, since per Pub 590-A
The earnings are considered earned and received in the year the excess contribution was made.

AJ

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Thank you AJ - That is extremely helpful!

One follow-up question - What do I do with the funds transferred back to me from the old Brokerage? Do I simply deposit it into my current ROTH? How would I do this without it impacting my current Tax Year contribution limits? Would it open up a whole different can of worms to use the funds for other, non-IRA, purposes?

Edited to add: To clarify, the 2023 funds were returned to me so these at least do not go into my current IRA and hence are not counted for contributions, right? The previous years over-contributions were also returned to me, but since they are in previous Tax Years, they are essentially “baked in” and cannot just be ignored, correct? I have to acknowledge them AND put the funds in my current ROTH, correct?

Many thanks!

Not unless you want to make them part of your 2024 Roth IRA contribution. Since it’s before April 15, you could have used them to make your 2023 Roth IRA contribution, but since you apparently have already maxed that out, you can’t contribute any more.

You don’t. They were excess contributions and should not have been in your Roth IRA.

Correct.

No, they are not ‘baked in’. They have been properly removed, since they shouldn’t have been in your Roth IRA to start with.

No. You have to acknowledge them on your tax form by declaring excess contributions, but they don’t go back into your current Roth, since they shouldn’t have been in there to begin with.

AJ

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Ok, that all makes sense now. Missed the forest for the trees there at first - not normally this dense, but oh well. Thank you very much for your kind assistance!

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