Net income attributable is the gain or loss in your IRA from an excess contribution. Learn how to calculate earnings on excess Roth IRA contributions.
If you find yourself needing to remove part or all of an individual retirement account (IRA) contribution to avoid a tax penalty, there is a way. As we learned in part one, investors can fix their oversight using the removal of excess contribution (ROE) rule. Doing so requires a little math, specifically, crunching what the IRS calls net income attributable, or NIA.
NIA is simply the earnings (or losses) in your IRA for the period of time the contribution is held. But you can’t calculate NIA based on how a particular position held in your IRA performed during that time period. Instead, you must take into account the overall value of the IRA, including any contributions, distributions, and/or recharacterizations.
Remember, you’re only taking into account the IRA that contains the excess contribution. You’re not including your entire retirement portfolio. NIA is calculated using Treasury Regulation 1.408-11, or you can find it in IRS Publication 590 in the section labeled Excess Contributions.
Here’s the formula for how to calculate earnings on excess Roth IRA contributions and some definitions to get you started:
NIA = Total earnings x (Excess contributions/Adjusted opening balance)
Total earnings is calculated by subtracting your IRA’s adjusted opening balance from the adjusted closing balance prior to removing the excess contribution.
Adjusted opening balance is your IRA’s opening balance at the beginning of the period the excess was contributed, including any contributions, transfers, rollovers, or recharacterizations in the IRA since the excess contribution was made.
Adjusted closing balance is your IRA’s closing balance prior to the removal of excess, plus any distributions (including rollovers, transfers, and recharacterizations) taken from the IRA during the period the excess was in the account. This is the part that tends to get tricky, as you must include anything removed from the account to get an accurate NIA for the period.
Let’s say you’re 40 years old, and you—or more likely your tax advisor—notice that $5,000 contributed to your IRA for 2022 was in excess. The closing balance is $8,322.25, and you did not take any distributions. Your IRA opening balance was $3,000.
Excess contribution = $5,000
AOB = $3,000 + $5,000 contribution = $8,000
NIA = $8,322.25 – ($8,000) = $322.25 x ($5,000/$8,000) = $201.41
Therefore, you must remove $5,201.41 from the IRA in which the excess occurred. Remember, you are taxed on the NIA ($201.41), and because you’re 40 years old (for this example), the early distribution penalty of 10% applies.
Calculating NIA may appear straightforward, but it can get confusing fast. Always consult your tax professional if you have any doubts. The underlying message is: If you’re over, don’t panic. There’s a fix. Just remember, there’s a 6% penalty for any excess contribution and NIA not removed by your tax filing deadline (usually April 15) not including extensions.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.