I overcontributed to my Roth, then lost half of this money to the market. Does the 6% penalty apply to my original contribution, or only what's left of it?

By Denise Appleby AAA
A:

It depends. If the excess contribution is removed from your Roth IRA by your tax-filing deadline plus any extensions, along with any net attributable income (NIA), the 6% excise tax does not apply. If the excess contribution is not removed by the deadline, you owe the IRS a 6% excise tax for every year the amount remains in your Roth IRA as an excess contribution. An exception applies if the market value of your Roth IRA for the previous year-end is less than the excess contribution. Under this exception, the 6% excise tax would apply to the market value of your Roth IRA for the previous year-end, instead of to the contribution amount.

Note: Bear in mind that excess contributions that remain in your Roth IRA gets applied as a Roth IRA contribution for the following year, and continues until the excess is used up.

When you overcontribute to your Roth, the 6% penalty applies on the amount contributed, regardless of its current value. For example, if an excess contribution of $5,000 was made and the market value declined to $2,500 by the end of the year, the 6% penalty would still apply to the $5,000. The loss of market value does not change the rules. That may seem unfair, but look at it another way: if the original amount had grown to $10,000, the penalty would still only apply to the $5,000.

To learn more, read Correcting Ineligible IRA Contributions - Part 1, Part 2 and Part 3.

This question was answered by Denise Appleby.

RELATED FAQS

  1. Will I pay taxes on my Social Security payouts?

    Find out if you're one of the people who has to pay federal income taxes on the Social Security benefit you receive.
  2. Can I deduct my Individual Retirement Account (IRA) contribution on my tax return?

    Whether you can deduct IRA contributions on your tax return depends on the type of IRA you have, your participation in an ...
  3. Can I contribute to a Roth IRA and still participate in my employer-sponsored retirement ...

    Find out the rules and limits on contributing to both a Roth IRA and employer-sponsored retirement plan.
  4. At what age will I be eligible for the maximum Social Security payout?

    The year you choose for collecting your social security will play a large part in determining how much money you'll receive ...
RELATED TERMS
  1. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  2. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  3. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  4. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  5. MyRA

    A new tax-advantaged retirement account that President Barack ...
  6. Provident Fund

    A compulsory, government-managed retirement savings scheme used ...
comments powered by Disqus
Related Articles
  1. 5 Ways To Stretch Your Retirement Budget
    Budgeting

    5 Ways To Stretch Your Retirement Budget

  2. It's Never Too Early To Start Saving
    Savings

    It's Never Too Early To Start Saving

  3. 5 Tax(ing) Retirement Mistakes
    Retirement

    5 Tax(ing) Retirement Mistakes

  4. Payroll Deductions Pay Off
    Retirement

    Payroll Deductions Pay Off

  5. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

Trading Center