An excess contribution results when a taxpayer has contributed more than the annual limit to a traditional IRA or a Roth IRA. If any part of the excess contribution is allowed to remain in the IRA past the due date for correcting the excess, it is subject to a 6% excise
tax (6% penalty tax). The 6% penalty tax applies each year the excess is allowed to remain in the IRA.
To correct an excess contribution, the excess contribution must be withdrawn by the due date for filing the return, including extensions. The withdrawal of the excess contribution is considered tax-free if:
• The taxpayer does not take a deduction for the contribution, and
• The taxpayer withdraws any interest or other income earned on the contribution while it was part of the IRA. For this purpose, any loss on the contribution is also taken into consideration when calculating the amount to withdraw.
If more than one contribution is made during the year, the last contribution is considered to be the one that is withdrawn first for purposes of calculating net income on earnings.
If the excess contribution is withdrawn after the due date (or extended due date), the withdrawal is generally taxable. However, the withdrawal is not taxable if both of the following conditions are met:
• Total contributions (other than rollover contributions) for the tax year were not more than the contribution limit that is not based on the taxpayer’s compensation ($5,500/$6,500 limits that apply for 2016), and
• The taxpayer did not take a deduction for the excess contribution being withdrawn.
Another way to handle an excess contribution is to pay the 6% penalty on the excess and leave it in the IRA. In the following
year, under contribute to the IRA for that year and apply the prior year excess contribution to the current year contribution. If the excess contribution carryover is still in excess of the contribution allowed for the carryover year, pay the 6% penalty on the difference
and carry the remainder over to the next year. Keep doing this until the excess is used up.
If you need assistance dealing with an excess contribution, contact Steve Siesser at firstname.lastname@example.org/div>
Prior to 2014, the IRS applied the one-rollover-per year limitation for IRAs on an IRA-by-IRA basis, meaning each IRA was limited to one rollover per year allowing a taxpayer to make multiple rollovers in one year using separate IRAs for each rollover. However, beginning in 2015, the IRS withdrew its proposed regulations and followed the Bobrow Tax Court decision (T.C. Memo. 2014-21) in which the court ruled an individual can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regard-
less of the number of IRAs owned.
Are Coverdell ESAs subject to the same one rollover per year limit regardless of the number of ESAs owned by the taxpayer? There is no published guidance interpreting Coverdell ESA rollover limitations. However, IRS Pub. 970, Tax Benefits for Education, states that only one rollover per Coverdell ESA is allowed during a 12-month period.
In light of the similarity of the language in the code concerning IRA rollovers and Coverdell ESA rollovers, the IRS recently stated in a Program Manager Technical Assistance letter that only one rollover per individual per year is permitted for Coverdell ESAs. The letter
suggested that IRS Pub. 970 should be updated using the following language:
“You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell ESAs you own. However, you can make unlimited transfers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers are not considered to be distributions or rollovers. The once in any 12-month period limitation rule does not apply to the rollover of a military
death gratuity or payment from Service members’ Group Live Insurance (SGLI).”
If you need assistance figuring out the maze of IRS rules governing educational savings plans, please contact Steve Siesser at email@example.com