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. What are the Roth 401(k) withdrawal rules?

    Understand the requirements for tax-free withdrawal from a Roth 401(k) account, how early withdrawals are taxed and options ...
  2. What are the main differences between a Roth 401(k) and a 401(k)?

    Learn more about financial planning, investment options and decision making between traditional 401(k) and Roth 401(k) accounts, ...
  3. How can I start or set up a Roth 401(k)?

    Find out more about what options you have to set up a Roth 401(k).
  4. What are the benefits of an independent/individual 401(k)?

    Understand the benefits of the individual 401(k) retirement savings plan and how it differs from traditional IRA based retirement ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Gold IRA

    Definition of Gold IRA
  3. Eligible Transfer

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

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

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

    A term for the period of time leading up to actual retirement. ...
comments powered by Disqus
Related Articles
  1. Top Financial Frights: Emergencies & ...
    Investing Basics

    Top Financial Frights: Emergencies & ...

  2. Steps To Retiring With A Reverse Mortgage
    Retirement

    Steps To Retiring With A Reverse Mortgage

  3. When Your Job Offers An Awful Retirement ...
    Retirement

    When Your Job Offers An Awful Retirement ...

  4. Top 5 Strategies To Pay For Elder Care
    Retirement

    Top 5 Strategies To Pay For Elder Care

  5. 5 Top Alternatives To A Reverse Mortgage
    Retirement

    5 Top Alternatives To A Reverse Mortgage

Trading Center