How to correct periodic excess Roth IRA contributions, with Direct Rollover within the same timeframe?

Question

In 2019, I accidentally contributed to my Roth IRA, despite my income being over the limit. I made periodic contributions of $200 every month, totaling $2400, which I plan to remove before the April 15th, 2020 tax deadline to avoid a 6% penalty. (I was advised that I can distribute this excess contribution and earnings to my checking and immediately put the money in my Traditional IRA to also avoid the 10% early distribution penalty.)

I am trying to calculate the net income attributable (NIA) for these contributions based on the equation provided by the IRS:

Net income = excess contribution x (ACB - AOB) / AOB

I'm assuming I need to calculate this based on each contribution individually, then total the NIA afterwards. One complication is that I also performed a direct rollover (about $27,000) from my Roth 401k to this Roth IRA in May 2019. So, I'm having trouble decoupling this rollover from the earnings calculations. The details look something like this:

Date Contributed     Contribution Amount      AOB          ACB        NIA
1/15/2019                           $200      $16,000      $55000     $488
2/15/2019                           $200      $17,000      $55000     $447
3/15/2019                           $200      $17,500      $55000     $429
4/15/2019                           $200      $18,300      $55000     $401
5/15/2019                           $200      $18,600      $55000     $391
6/15/2019                           $200      $47,000      $55000     $34
7/15/2019                           $200      $46,750      $55000     $35
8/15/2019                           $200      $47,000      $55000     $34
9/15/2019                           $200      $47,300      $55000     $33
10/15/2019                          $200      $48,000      $55000     $29
11/15/2019                          $200      $48,500      $55000     $27
12/15/2019                          $200      $50,000      $55000     $20

Total Contribution                                                 Total NIA
$2,400                                                             $2,368

As you can see, I would expect that the earnings on each of my $200 contributions would be in the $20 - $40 range, but the 401k rollover is making the NIA much higher for the beginning of 2019. Is this correct? Or is there some way to exclude the rollover amount so that a better representation of the $2400 earnings (based on market gains) can be calculated?

Answer 1

After a bit more digging, it appears my original calculation for Adjusting Opening Balance (AOB) was not completely correct. I initially interpreted that AOB is the balance immediately prior to the excess contribution plus the excess contribution itself. It is actually more than that, as seen in Step 3 of the IRS guidance below:

Determining the Amount of Net Income Due to an IRA Contribution and Total Amount to be Withdrawn From the IRA

1. Enter the amount of your IRA contribution for 2020 to be returned to you.
2. Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterizations made while the contribution was in the IRA.
3. Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA.
4. Subtract line 3 from line 2.
5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places).
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned.
7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you.

Not only should AOB include the excess contribution, but it should also include "any other contributions, transfers, and recharacterizations made while the contribution was in the IRA". This section is important, as it removes the affect of the other contributions and transfers on the NIA calculation.

So, for example, the AOB for my first excess contribution (1/15/2019) should be computed by summing:

• The prior month end balance
• The excess contribution in question
• The other excess contributions thereafter
• The transfer into the account (rollover from 401k)

Breaking this out in an equation, we have:

$16,000 + $200 + (11 * $200) + $27,000 = $45,200

Thus, applying this correction to each of my 2019 excess contributions, the updated AOB values and correct NIA calculations should look like this:

Date Contributed     Contribution Amount      AOB          ACB        NIA
1/15/2019                           $200      $45,200      $55000     $43
2/15/2019                           $200      $46,000      $55000     $39
3/15/2019                           $200      $46,300      $55000     $38
4/15/2019                           $200      $46,900      $55000     $35
5/15/2019                           $200      $47,000      $55000     $34
6/15/2019                           $200      $48,200      $55000     $28
7/15/2019                           $200      $47,750      $55000     $30
8/15/2019                           $200      $47,800      $55000     $30
9/15/2019                           $200      $47,900      $55000     $30
10/15/2019                          $200      $48,400      $55000     $27
11/15/2019                          $200      $48,700      $55000     $26
12/15/2019                          $200      $50,400      $55000     $18

Total Contribution                                                 Total NIA
$2,400                                                             $378

This Net Income Attributable value looks much more reasonable.