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Over contributed to your Roth IRA and now you need to fix it. So I'm going to go over some rules that you need to be aware of. And then I'm going to go over for examples to help you figure out how to calculate it, including a link to a worksheet that's going to make it a lot easier and a blog post that I'm going to go through So you have all the tools and resources ready to fix this.
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What's going on, guys? Welcome back to the Channel or did your first time on our channel. Welcome to the Channel. My name is Travis Sickle. And let's go ahead and get right into it. So there's a couple of things that you need to be aware of. The method I'm going to use in this video. Means and requires that you're doing this fix before you're filing your taxes, including extensions.
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Now, if you've already filed your taxes, but you haven't hit the October 15th deadline, for your tax filing year. Guess what? You could still do this fix. You can still do an amendment. And if you filed an extension, you can still fix it. Even if you didn't file an extension. You can still fix it just as long as you submitted your taxes on time.
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That is the only thing you need to do in order to complete this fix. So that is rule number one in order to even qualify to do this method. We're going to take the money out of the Roth IRA or you can recharacterize it over to the traditional IRA. Either way, the math that I'm going to go through is going to help you calculate.
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So, you know, exact tally how much you either need to take out or recharacterize. Now, the difference here is if you take the money out of the Roth IRA, the growth portion that's going to be attributable also called the net income attributable will be taxable as ordinary income. In addition, you're going to get a 10% penalty if you're under the age of 59 and a half.
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Now, if you recharacterize it, you can avoid all of that. So you're not going to have a penalty. If you can qualify into a recharacterization over to your traditional IRA, and if you've heard about the 6% excise tax penalty on the excess contribution that is not going to apply in how we're going to do the calculation that would only apply is if we didn't do this calculation and fixed the excess Roth contribution before our October 15th deadline.
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Now I say October 15th, it's usually October 15th, but if it falls on a weekend or holiday, they just move that date around. But it's usually October 15th as long as you file your taxes or filed an extension. And I'm going to say it one more time. If you already filed, you don't have to actually file your extension in order to qualify for this extension on this fix.
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So with your taxes, the automatic extension, you actually have to file something to get it In this instance, you do not. But if you didn't file your taxes and you still have this fixed and you're after the April 15th deadline. That's right. The April 15th deadline, then you're not going to qualify for this extension and you have to move on to a different way in order to fix it.
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But if you're in this window then you can still watch this video and use this method. So before we go ahead and get started, let me go ahead and pull up some resources on the blog post to show you what you need. And you're going to have it all in front of you, including the worksheet, which will help us work through these four examples that I'm about to go through.
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So here's my blog and the post that I'm talking about is how to fix the excess Roth contributions. And if we just scroll down a little bit, you'll see I have a spot about the 6% penalty and how to avoid it. But here is what you need to know. You need to know the modified adjusted gross income for your Roth IRA to figure out what your excess contribution is.
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And this is where it's really going to start. So once you figure out your modified adjusted gross income and I have the worksheet right here, then you're just going to scroll down to figure out what your phaseout is. So this first one figures out what your income is, your modified adjusted gross income. Then you're going to apply this to the phaseout.
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Now, if you're below the phaseout and I have them right here. The Roth IRA income limits, these are modified adjusted gross incomes. But if you're single for 20, 21 and you earn under 125,000, you're not going to have this issue although you could still have an excess contribution. You can still make the full $6,000 contribution. But you could see the phaseout goes up to 140,000 for singles.
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So if you're right in the middle of this, then you're going to want to use this worksheet on the phase-out to figure out how much you would qualify for and which part was your excess contribution and so if you scroll down even further, you're going to see this links to downloading the worksheet and that is what I'm going to go through.
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But if you also like to read about it, you can go to this blog post and I go step by step on all the different sections on how to fill out this worksheet. So let's go ahead and bring up the worksheet. And let's go through our first example. So the first example that I'm going to go through and I'll go ahead and pull it upright on the screen for you, I find that this is the best way to do it.
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Just because there are so many different nuances. So I chose four examples where I drew out four examples to hopefully make this a little bit easier. So you can follow along. So let's say that on January 1st of 20, 21 you had a Roth IRA that had $500 in it and there was no growth. So let's say we had no growth until February 1st.
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2021, no growth and we made it a contribution of $500. Now, this is our first contribution. This was already previously contributed in prior years. So it's $500 and then we contributed $500 bringing our total to $1,000. Now we had some growth in my example and it grew to $2,000 on 4/1/2021. And then we had a rollover contribution of $4,000 on 5/1.
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And then so that means we had $6,000 or 2000 plus our four was our six and then our $6,000 by January 15th grew to $8,000 So let's go ahead and take a look at the worksheet here and we could see the excess contribution. Now, these are the numbers that we need to understand here. So the excess contribution here wise is going to be the full amount.
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We're just going to assume that we didn't qualify for anything So that means it's $500. And let me bring up this really quickly so you can see it. $500 was our only contribution. This is a rollover contribution. This was our only contribution into the Roth IRA. So this means that we're going to put in our excess of $500.
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Now, if we look at our numbers here, we can see that $8,000 was on January 15th, 20, 22. But it is the date that we're going to remove it. So that's what we want to take a look at. This is actually the closing balance is what you should be using of yesterday. So after 4:00 is when you want to run this math and you're going to look to what the closing price was of all the positions add up all of the positions, including the cash in that single Roth IRA that you have the excess and that is what you need to look at.
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You need to look at the Roth IRA that has the excess contribution. You have three or four Roth IRAs. You're not going to aggregate them. You're not going to look at all of them across the board, just the ones that you made the excess contributions to. So if you have one that you made the excess contribution to, that's the one that you're going to have to pull it from.
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You can't pull it from another Roth IRA or even bother with the math on the other Roth IRAs because they're not included in this calculation. It is only for the Roth IRA that you made the excess contribution to. So moving on to the next cap into amount of any withdrawals, we didn't make any of those account balance immediately before the excess was made was $500.
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And we could see that again. Right here that we started with 500 contribute 500. There was no growth. So this is the balance right before our excess was made. So that means a number for the amount of the excess contribution and all subsequent contributions made before the excess removal. So that is going to be 40 $500. The reason it's going to be 40 $500 is because our excess was 500, but we also had a rollover contribution of 4000.
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Now this wasn't an excess, it was a rollover contribution but the amount that we have to add up includes the contributions and all subsequent contributions. So $500 was our excess. What came after it is 4000 that's what we need to calculate. So that's where we're getting $4,500. Now for number five, any time deposit penalties that will be applied due to the excess removal that is going to be zero.
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It's likely to be zero. Those are any penalties that you might have associated with things like a CD or an annuity. Or basically those are the only two that come to mind. If you have any charges for liquidating your assets in order to take them out of the Roth IRA, that would be included on any time deposit penalties.
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But for most people, they're probably not going to have that. So just put zero in almost every example I run or anything I encounter with an excess contribution, it's always zero. So that's what we're going to put there. So if we scroll down, we can see the math right here on the formula. And our excess contribution was $500 and our total earnings was $3,000 or adjusted opening balance.
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So we're opening balance was $500. But our adjusted opening balance and you can see the definition right here, the balance of the account immediately before the excess contribution plus the excess contribution and all subsequent contributions. So we're basically taking that 4000, the $500 and adding it to the original $500. And that's where we're getting $5,000 from. So doing this math, our net income attributable is $300.
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So we need to take out the excess plus our net income attributable, which is $800. So that was example number one. Now we're going to go through example number two and let me go ahead and pull it up on the screen for you. So on January 1st 20, 21, I'm keeping that number the same. $500. It also did not grow.
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So on February 1st 20, 21, we made an additional contribution. Contribution $500, total balance, 1000 same math. This is growing to $2,000. And then we're realizing our mistake on January 10th, 20, 22, but we had another thousand dollars in growth. So let's go ahead and walk through this on the screen. Let me go ahead and Xerox some of these numbers and we can go ahead and plug what we want.
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And I would suggest if you're going through this, that you zero out all of the numbers just to start fresh. You don't make any mistakes. Our excess contribution amount. So our excess contribution, we only made one contribution of $500. So it's going to be $500. So we'll put $500 in there, our balance as of the date of withdrawal.
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So the balance as of the date of withdrawal is $3,000 because we're going to say this is the balance was on yesterday's close and then we're going to fix it the following day. So that's going to be $3,000 So we'll put in $3,000 and then the amount of any withdrawals we have none account balance immediately before the excess was made, immediately before was still our $500 right before and then the amount of the excess contribution and all subsequent contributions made before the excess removal.
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Now we did have any other contributions, no rollovers, no additional contributions. So we're going to put in $500 and then any time deposits will put as zero. And there you go with our math again. So we had $500 for the excess contribution and 2000 was our total earnings and 1000 was our adjusted opening balance. So just one more time $500.
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Plus you're taking all of the excess contributions and all subsequent contributions and adding it as our opening balance right back there on our $500. So that's where we're getting that math from. And then we have a total net income attributable after reading all those math, 4000 bucks and total amount to be withdrawn. 1500 dollars. Why excess was $500, but our net income attributable was $1,000.
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So I think the point I wanted to make here was and drawing out this example was that even if there's growth after 1231 of the taxable year, it still is going to be attributable until you fix it. So you need to make sure that you're fixing it before your tax filing deadlines, including extensions. So that is why I wanted to point out that example so now let's go to example number three and this one's going to be a little bit more involved.
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So kind of get those wheels, turn in for more real world examples. Sometimes these are hard to draw out, but let's go ahead and go through this one because this one has a lot more moving parts than the previous to kind of warming you up. Hopefully your situation isn't super complicated, but if you need to figure this out, I know going through a lot of examples helps.
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So let's go ahead and take a look at this. Now I'm going to draw it out two different ways because this is a little bit more complicated. So $500 per month, always on the 15th. So we're going to take 12 contributions of $500, bringing it to 6000 for the year. Our opening balance was 1000 on January 1st. 20, 21.
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November to December, our excess was 1000. What I'm saying here is that all through the year we were eligible for those contributions. But when we did our calculations, we actually over contributed by $1,000. So our November and our December contributions were in excess and all of the previous ones. They're okay. They're okay to be in there. They're not in excess.
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So we were eligible to contribute 5000 and the additional 1000 was in excess. But we are always making these contributions on the 15th of every month. Now, on November 14th, our balance was $7,000. Why am I using the 14th? Why? Because it's right before our 15th contribution in November and we're going to fix this on March 2nd of the following year.
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So I'll put it in 20, 22 and then throw that in there for you and our ending balance was 13,000. So before we go to the worksheet. Let me go ahead and pull this up on a little bit different way of looking at it. And I try to draw out a timeline here. So hopefully this makes sense. We start it with $1,000.
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We make January, February, March, April, May, June, July, August, September, October, and November. So our November 11, 14 was $7,000. Then we're going to make our 500. These two were in excess and then we have January and February of 20, 22. Our balance right before we're going to fix this is 13,000. So let's go ahead and plug some of these numbers in here.
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So first let's go ahead and zero these out so we can get through this zero these out and where we go 000000 our excess contribution was $1,000 could be is November and December. So that's 500 each $1,000 balances in the date of withdrawal that's going to be our $13,000 which is the balance on March. What did I say before March 2nd.
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So the March 2nd is the balance that we're going to look at or March 1st is what we're going to look at. We're fixing this on March 2nd. Same thing. It's our closing balance or date of withdrawal right before our date of withdrawal amount of any withdrawals. We don't have any withdrawals account balance immediately before the excess was made. So that's going to be our $7,000.
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And we're saying that was on 11, 14 following day. We make our 500 all our excess contribution. And then the amount of the excess contribution and all subsequent contributions made before the excess removal. Now only bring this up on the screen again. So we made this contribution which was our first excess and we're fixing it on March 2nd. So we have to include 500, 500 and also 500 and another 500 because it's right before we're going to fix it.
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I'm certain that somebody is going to get tripped up and think that this is not included when in fact it is. So it's going to be $2,000. So the amount of the excess contribution and all subsequent contributions made before the excess removal So that's going to be $2,000. Any time deposits are going to be zero. So we have our $7,000 and our $2,000 and our adjusted opening balance now is $9,000.
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So the big difference here is our excess contribution was $1,000, but our total contributions were 2000. And sometimes when you're looking at this, you might think, well, how are these numbers different? Because you can't possibly make a contribution that isn't in excess after your first contribution, but you can if it's made in the following year, like in this example or in the previous example that we talked about, if we had a rollover contribution.
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So either one of those types of contributions will not be in excess. So it's 1000 here. 2000 there. And this makes our math excess contribution total 1000, which is 1000 from here. And then our total earnings was 4000. That's our total would gain and we have to figure out how much of this gain was attributable to the $1,000.
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So our adjusted opening balance, which adds everything to So it's going to add all of those contributions to our opening balance. So 7000 plus are 2000. That's where we're getting the 9000. So it's this 7000 a year this 2000 here that equals or 9000, and that gives us a net income attributable of $440.44 bringing the total amount to be withdrawn at $1,444.44.
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So we do have one more example, especially if you're trying to figure out how do these rollovers or non excess contributions actually affect the calculation because they do. So let's go ahead and go through an example to show you what that looks like. So if you think there's a strategy that actually might be So let's go ahead and take a look at this.
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1231 20, 20 $500, I could have put January 1st. It doesn't matter. $500. January 1st of the year. You put January 1st here. The following day we make a contribution of $500. Basically the same example we've been running through. We have $1,000 in this account. That 1000 turns into $2,000. And 1231. We're going to make another contribution of $500, bringing the total to $2,500.
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We immediately realize we made a mistake on January 1st of 20, 22 and we are going to get to work and we are going to fix this. So here's what I want to point out. We have to figure out what the net income attributable is. But here's what's interesting. The net income attributable, you would assume, is associated with the actual investment whether or not it is in cash, it is irrelevant.
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Think about that. If you made the contribution, let's say you made that first contribution and we left it in cash. And all the growth from what you're looking at, your statements was attributable to the positions that you bought before you ever made the excess contribution. It doesn't matter. It's all if it's in this single IRA, it's commingled. That means it's all mixed up.
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So it does not matter if you made the contribution and left it in cash or you invested it or you had cash and you invested the $500 that you put in there. It doesn't matter. It's co-mingled. So all of the gains will be attributable to either the excess or your existing balance. So that's basically the way that this is going to work.
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So that's what I want to point out here. And you're going to notice that last contribution had no growth realistically associated with it. So you might be wondering how is this math calculated? So let's go through it. So the excess contribution amount here is going to be $1,000, $1,000 because we didn't qualify for anything in this example. So we made two contributions, and they're both in excess of $1,000 balance as of the date of withdrawal.
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So the date of withdrawal is going to be $2,500 amount of any withdrawals. We didn't do any withdrawals in any of these examples. And number three, the account balance immediately before the excess was made is still our $500 because we made we had $500. There was no growth, we made the contribution $500, and so it's $500. So the amount of the excess contribution in all subsequent contributions before the excess removal, in that case, it's going to be $1,000 because we didn't have any rollovers or any other contribution INS except the excess contributions, which there were two.
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So now let's take a look at some of this math. Our adjusted opening balance is 1500 dollars. You start with the $500 and then you add your two contributions, gives you $1,500. We go down here and we see an excess contribution of $1,000 because we made two contributions $1,000 in total earnings or adjusted opening balance. Divide all that by $1,500.
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We get net income attributable of $660.67 amount to be withdrawn, $1,666.67. Now here is what is interesting about this example, is the fact that that last $500 didn't do anything for you. So we just contributed at the very last second. There was no growth. But as you're doing this calculation, you're going to realize by making that contribution, it gets tacked on to that opening balance, which then has a greater amount that gets attributable to that excess contribution.
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So the excess contributions will take on more weight set another way if we never made that contribution. The only $500 of the gains would have been associated with the excess contribution. But because we made that last $500 contribution and it was in excess, that means more is going to be attributable. Because in that instance, we see we see that our net income attributable here is $666.67 rather than $500, which might be the more logical way of looking at this, that it would be $500, but it's not at $667 if you're rounding, and then you're going to add that to the total excess contribution.
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So hopefully this examples have helped and used the blog post, use the worksheet. Go, go slow. Do it possibly on a weekend to make your life a little bit easier. And if you have any questions comments, let me know in the comments. Down below. Check out the blog post or leave that description at the bottom as well. And if you've enjoyed this video, be sure to subscribe and leave your comments down at the bottom.