2020 excess IRA contributed

[ajaypai1971]

Hello!

already filed 2019 taxes.

i have contributed excess to 2020 IRA (roth too).

What do i do to avoid taxes and penalties. or do i take care of it next year when filing the returns for 2020 in 2021

[JohnB5677]

The first thing is to withdraw the overpayment now.  Be sure that the amount includes any earnings.

You will have to amend your 2019 return.  You can do it this year, or next year.  Next year you will get the 1099-R that represents the withdrawal of the excess funds.

If you've filed your return and need to add additional information, then you will have to prepare an amended return in TurboTax.

If you used TurboTax Online, simply log in to your account and select “Amend a return that was filed and accepted.” 

If you used our CD/download product, sign back into your return and select “Amend a filed return.” You must file a separate Form 1040X for each tax return you are amending.

Amend ONLINE    OR     Amend CD/Download       Amend 2016 - 2019

You will have to mail the amended return.  The IRS limits the system to only one Social Security number or Tax ID  to be E-Filed.  This is to guard against fraudulent tax returns.

[ajaypai1971]

if i may, a followup:

since the IRA contribution is for 2020, why am i needed to amend my 2019 return?

[Critter]

If you know you have excess contributions for the 2020 tax year then remove them NOW ... tell the custodian that you need the excess plus earning removed.  

[ThomasM125]

You don't need to amend the 2019 return. 

[ajaypai1971]

i read this from the IRS pub 590-A:

""you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year.""

so if i do not contribute in 2021 and apply this year's (2020)  excess contributions to 2021, i believe i can get over the situation?

Again, as per IRS(590-A):

""

This method lets you avoid making a withdrawal. It doesn’t, however, let you avoid the 6% tax on any excess
contributions remaining at the end of a tax year

""

I'm ok paying the 6% as it amounts to 300 ( as i contributed 5100 excess). 

I'm not ok giving up the gains (as of today, i know no guarantees for tomorrow)  and then additional tax on that gain , if i do absolutely have to withdraw.

Thoughts??

[Critter]

If you want to pay the penalty then leave it alone ... just make sure you are eligible for the next year or that 6% will keep being applied every tax year.

[ajaypai1971]

<< just make sure you are eligible for the next year or that 6% will keep being applied every tax year>>

meaning, 6% will be applied only once correct. ie adjusted to next years contribution and then from there on no more penalties correct?

thanks to all for the awesome quick replies... 

[Critter · Accepted solution]

Correct ... you pay the 2019 penalty and then if the contribution is allowed in 2020 you are good ... if not then there is another 6% penalty for 2020...   until the contribution is allowed the penalty will recur every year. 

[rmor41]

just so I'm clear:

if I put $10,000 in a traditional IRA (2019) and pay the 6% penalty on the excess of $3500 on 2019's return - is the penalty discontinued for 2020 return if I contribute $3000 or less in 2020 therefore only donating no more than the maximum allowable amount over a 2 year period? Thanks

[Critter]

YES ... if you stop over contributing the excess goes away automatically.

[DaveF1006]

This is incorrect. According to this IRS link, as long as the excess contribution remains in the account, it will continue to be be taxed until it is withdrawn. 

[ajaypai1971]

It also says that there are certain conditions that will let you avoid that:

----

See Publication 590-A for certain conditions that may allow you to avoid including withdrawals of excess contributions in your gross income.

----

That is what I was referring to. Pub 590-a

[DaveF1006]

i noticed in that publication that you can deduct an excess contribution in a later year. Here are the conditions.

You can’t apply an excess contribution to an earlier year even if you contributed less than the maximum amount allowable for the earlier year. However, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year.

You can deduct excess contributions for previous years that are still in your traditional IRA. The amount you can deduct this year is the lesser of the following two amounts.

• Your maximum IRA deduction for this year minus any amounts contributed to your traditional IRAs for this year.

• The total excess contributions in your IRAs at the beginning of this year.

There is a worksheet Worksheet 1-5. Excess Contributions Deductible  in the Pub 590 that helps you determine how much  excess contributions for previous years that you can deduct this year. Check it out.  

[rmor41]

Thanks for taking the time to respond - very helpful!