Earnings on excess Roth contribution

[joanmcq]

Taxpayer contributed to a Roth in 2011 & 2012, but was over the income limit for contributions for both years. Both over contributions were withdrawn in 2012. If the taxpayer had adequate basis in earlier years' contributions, are the earnings on the excess contributions still taxable & subject to penalty?

[JJStephens]

The excess contribution is subject to penalty (using Form 5329) for each year it remains in the plan. The excess contribution can be withdrawn or applied to a subsequent year, provided the taxpayer has not already contributed the maximum amount for that year.

The earnings on the excess can also be withdrawn or applied--however that amount is taxable in the year constructively received (if it is included in the new contribution, it effectively becomes a wash).

[joanmcq]

They removed the excess contribution, but are the earnings subject to penalty? The 1099-Rs show $5056 withdrawn with $56 in the taxable box. When I put the basis and distributions in page 2 of the 8606, none of it is taxable, since they have lots of basis from earlier years when they were single. I know in a regular withdrawal from a Roth, basis comes out first. But I'm not sure with an excess contribution. All I can find out about these by research has to do with regular IRA excess contributions.

[JJStephens]

The earnings on the excess are subject to penalty only if they are left in and become part of the subsequent year's excess.