Amending 2020 Return to Remove Excess IRA Contributions

[hikingjefe]

I had deferred income in 2020 that I incorrectly used to make contributions to my and my wife's Traditional IRAs.  I've since come to realize that it was not considered earned income so part of the contributions we made were excess.  I had the brokerage remove the excess contributions this year, in February 2022.  Based on what I've read I will need to amend my 2020 returns to show the allowed contribution only.  Should I amend the return now, and pay the taxes owned to both Federal and State,  or wait until I get a 1099R from the broker?   Or, will the 1099R be applied to my 2022 return to calculate any penalties owned?  

[MaryK4 · Accepted solution]

An IRA makes a corrective distribution by timely distributing the amount of the excess contribution, together with any accumulated net income attributable to the excess contribution. Timely is the due date for the tax return.  Because you did the distribution in 2022, the excess penalty for 2020 applies.

If you withdraw the excess funds by December 31 of the following year you avoid the 6% penalty for the following year.  Since you did not withdraw the excess by December 31 of 2021, you must pay the penalty again in 2021.

You will have to amend your 2020 to include the Form 5329 so that you can complete the 5329 for 2021.

[hikingjefe]

Thanks for the reply.  I still have a question on the timing of amending the return.  Is it necessary to wait to amend until I have a 1099R or is it best to do it immediately without waiting for the 1099R?  

[DanaB27 · Accepted solution]

You will amend the 2020 return now without waiting for Form 1099-R to include the 6% penalty as mentioned by awesome expert MaryK1101. 

The distribution of the excess contribution will be a regular distribution (without earnings) because it is made after the due date of the 2020 tax return. You will report the 1099-R on your 2022 tax return.

@hikingjefe