Over contribution.

Emily

My husband and I filed our taxes “married filing separately” last year. We live together and his MAGI was over $10,000. I just read that he should not have been able to contribute to a Roth IRA, which he did. I didn’t see a penalty when he filed his taxes last year.

Does the IRS let you know when you have over contributed? Will we see it on the taxes when we file this year? I read that you can avoid withdrawing the funds if you apply the excess contributions and earnings to a future year. Could he use them for this year since he hasn’t reached the limit yet? How do we do this? Thanks!

CoryF

The IRS may not catch the overcontribution immediately. They have methods of detection after the contribution year that they can enforce rules in their favor. These can include a Form 5498 sent to you from the financial institution and to the IRS and/or tax returns filed (filing status Married Filing Separately). FreeTaxUSA will flag the contribution if you report it (and you should report contributions) with possible solutions suggested.

For example, if you were to not report the Roth IRA contributions, the IRS could find information that causes an Audit. During the audit, the overcontribution would then cause a 6% penalty for each year your contribution remains unwithdrawn or uncharacterized (explanation later). This is extra tax applied to your IRS account that would be due at the end of the audit.

The official ways to deal with overcontributions to Roth IRA are shown in Publication 590-A chapter 2 page 42. It shows that you can withdraw all contributions without increasing your future income. The Earnings would be taxable in the year of withdrawal. You can Re-characterize your Roth IRA contributions (and earnings) to a Traditional IRA which doesn't have any limits for contributing with Married Filing Separately filing status. Both of these solutions will be presented when you report the contributions on your FreeTaxUSA input pages.

You can also read more in this Community discussion thread.