Corrected Excess Contribs. carrying over from 2020 on after it was applied and thought it'll be cleared going forward

[sugersam5]

(NOTE: Every return was done on TTax Delux at some point)

2019

Took an early retirement at the end of 2019.

Received W-2 -----Did tax return in Feb. 2020---OK – No errors and Fed & State accepted!

*Contributed to a Roth IRA in 2019 (since 2017_auto monthly from bank) $30/m

2020

Started to live on my 401k savings from May (monthly paycheck _ to present) …Did not work the whole pandemic year.

Received 1099R for 401K & a 1099R for a small $ in a Roth 401k (7B code)...

NOTE: That source got depleted as of 2022

Start of my issues:

*Contributed to a Roth IRA the whole 2020 yr

Did tax return in Feb. 2021 and TTax hinted that my IRA contribs. were excess…I was totally not thinking or remembered that NO earned income NO contribs. to an IRA.

Informed the financial institution to do an excess correction- Took them about a month :\(

Meanwhile, I searched and searched for a similar situation (a post with a loss), and most of the search was in TTax Forum and almost if there was anything about excesses being applied to a tax return were ones with a gain or no gain/loss …but the process the experts were offering was to either create a 1099R (for 2021) in the 2020 Return and add a comment (I think on the Form 5329) stating that OR wait till the corrected tax form come in 2022 (for 2021 Tax Yr_Should have gone with this, perhaps would have no issues)_

I created a 1099R and added $285 ($360 - $75(loss) = $285) to

Lline 4a (IRA Distrib.) on 1040 and Line 1 on 1099R (2021)

Line 2a (2021-Taxable amount) = Zero

Box 7 (2021) = P & J  

I also checked off IRA/SEP/SIMPLE  portion of Box 7…..SHOULD NOT HAVE (my ERROR_Found that out recently per TTax Forum search)

Form 5329

Struggled for Form 5329, Part IV, as what to add for Line 18, I added $360 (I think it should have been $285??)

Line 21 (lines 19 + 20) = Zero

Line 22 (Prior yr Excess) = $360

Line 24 (Total Excess) = $360

Line 25 (Add’l Tax) = $22…..System calculation.

Comment (Explanation Stmnt. Line 4a): “I am reporting a 2021 1099-R on my 2020 Tax Return to avoid having to amend it in 2022”

NOTE: I am not sure (can’t recall) how much of this section was done by TTax and me (manually)

Thinking all is ok, eFiled….. OK – No errors and Fed & State accepted!

2021

NOTE_ Since I caught the excess issue in Feb. 2021 I ended up needing to have them correct the 2021 at the same time (for one month, January 2021)_ Stopped the auto contrib in Feb 2021.

Received a 1099R (distrib from 401K_monthly paycheck)

Received a 1099R for a small $ in a Roth 401k (7B code)

Received 1099Rs Excesses 2020 & 2021 (unfortunately I missed/forgot to apply the 2021 corrected 1099R_ 7&8 code, although it was for only $30 (Line 1) and Taxable Amount was $.32 (Line 2a) and Line 4 was $.09 (Fed Withholding) still I would have applied to eliminate as mush headache and do it right!

Since I had the Delux version I was not prompted (or I don’t think I was) that there was add’l tax ($22 (6% rate) again was applied, noticed after filling, but thought it perhaps goes away next filling…fogged memory- not sure what I thought at that time_ Too much were happening last three years with everyone! - needless to say)….Filed….. OK – No errors and Fed & State accepted!

2022

Received a 1099R (distrib from 401K_monthly paycheck) and

Received a 1099R for a small $ in a Roth 401k (7B code)

While I was about to efile, TTTax hinted that I may have add’l tax, this came up due to my initial version being the Free and had to upgrade to Delux after the warning (was hoping one year I could use the Free version, but…)….Then I went to efile and thought let me go thru the long version of the forms (printed and saved it as well- all 3 years were saved to my laptop) where I noticed the Sec IV in Form 5329 was repeated almost exactly as ’20 & ‘21 TxYrs)…..eFiled…. OK – No errors and Fed & State

I filed it, since the issue was from prior year(s) and desperately needed the refund.

_Am I to amend all three years (and do the 2020 without the manually created 1099R- And just apply the two corrected 1099Rs (2020 & 2021) on 2021 Return and subsequently do the 2022 and hope the corrected excesses are cleared?

Or

_Is there a way to do this with less headache and salvage most of it?

I am sorry for this being too long, but I am not sure how much would have been enough for an expert to assist me. Please kindly hep in this matter and let me know if I have to add/provide more info.

I appreciate it.

Micheal_

[dmertz]

When preparing your 2020 tax return, when TurboTax indicated that  you had a $360 excess contribution (are you sure that  the excess contribution wasn't $6,000 and $360 was the penalty?) should have told TurboTax that you will remove the excess contribution before the due date of your tax return and that the amount of contribution returned will be $360.  That would have eliminated the excess contribution on the Form 5329 and, absent any other reason to file 2020 Form 5329, the Form 5329 would have been omitted from your 2020 tax return entirely.

It seems that you need to amend your 2020, and 2021 tax returns (and your 2022 tax return if you already filed that with Form 5329 still showing the excess contribution to make the corrections to remove the penalty on Form 5329.  You'll need to prepare the Forms 5329 outside of TurboTax so that you can explicitly show zeros where the originals showed nonzero amounts.  You'll file each of these with Form1040-X showing the reduction in your tax liability and providing the explanation that the excess 2020 contribution of $360 was properly returned in March 2021.

Since there was an attributable investment loss, the 2021 code PJ Form 1099-R that you received does not need to be entered since it would be reflected nowhere on your amendments.

[sugersam5]

>demrtz

Thanks for the reply!

a) 12 * $30/m = $360/yr ....Like I mentioned my Roth barely has any $$ (~ $3k) in it, so no it was not $6000.

The $22 I mentioned was the 6% tax on $360 for excesses_ I believe the 6% is mandatory each yr that excess is not removed.

b) based on your first paragraph, amending these three years (I mentioned I had to file the 2022, since if needed to amend I could do it at a later date, furthermore I needed the refund, so it is another one to amend, sadly.) per your remarks in that paragraph could I still do them in TTax as you stated/advised? 

""...should have told TurboTax that you will remove the excess contribution before the due date of your tax return and that the amount of contribution returned will be $360.  That would have eliminated the excess contribution on the Form 5329 and, absent any other reason to file 2020 Form 5329, the Form 5329 would have been omitted from your 2020 tax return entirely.""... 

I did my best to answer what TTax would ask in each screen/tab and I am not sure where I could tell TTax that.

c) per your advice: 

""...You'll file each of these with Form1040-X showing the reduction in your tax liability and providing the explanation that the excess 2020 contribution of $360 was properly returned in March 2021.""

Does the above mean that I cannot do the amendments in TTax to start with?

d) amending each year, starting with 2020, could I just show only my income (1099R for 401K & 1099R for the Roth 401K) for the 2020 taxYr - and I assume it will ask if I had any IRA contribs. - in that case I show I have an excess, but not correct it until I do the 2021 TaxYr amendment, where I would/could apply the two corrected 1099s (2020 = $285 & 2021 = $30 + any earnings and Fed withholding) plus the usual 1099Rs (401K & Roth 401K)?

That would not clear the excesses based on the Box 7 codes (P&J 2020 and P&8 2021)?

e) per my thoughts in (d) would 2020 still create a 5329 and if so, should that matter, since I'd be applying the corrections on 2021 tax return?

Much appreciated.

Micheal_

[dmertz]

To do the amendments in TurboTax you would need the CD/download version for each year.  Since you have to prepare the Forms 5329 outside of TurboTax anyway, it would be probably simplest to just prepare the Forms 1040-X outside of TurboTax as well.

In 2020 TurboTax you would have told in the Roth IRA contribution section under Deductions & Credits that $360 was returned.  The same for 2021.

The code PJ and code 8J Forms 1099-R do nothing in TurboTax  to clear an excess contribution.  The only purpose to entering these forms in TurboTax is to add to income the amount in box 2a and add to tax withholding if any is present.  Your code 8J Form 1099-R had $0.32 in box 2a which rounds to zero, so that can be ignored as well.

[sugersam5]

Thank you!

Qs:

a) I had done my taxes in TTax online for the past 12/13+ years and never used any CD/software and also, I looked in TTax website where I access/prepare the returns and all three years can be amended online_ I understand what you said about the 5329. That said, how should I have done the 2020 so I could have avoided these amended even though the excesses were returned on time and corrected? 

b) Is  TTax unable to show the accesses were returned and clear it off the 2020 return? Perhaps it could till after 2021 was done by using the option to add the two corrected 1099Rs (2020 & 2021) on 2021 return instead of the way I did it, creating a 2021 1099R in 2020 return?

c) HYPETHETICAL:

What if I leave the $285 or $360, what have you, and let it carry on and every year pay the $22 tax/year. Then let say at some point when I become "topsoil" (pass away) and my beneficiary receives the Roth and decides to cash it out (assuming he/she is over 59 1/2 to avoid the 10% penalty) what happens to the excess at that time? They get to pay the 6% (again) on that $360 (how would they know of the existence of the excesses unless I tell them) after they cash out the Roth (let say right away and not exercise the 10 yr rule- given he/she is only few years younger than me too), even though there is nothing from the Financial Institution reporting it, since it was corrected?

NOTE:

Doing the forms outside of TTax will cause my continuation of using the TTax and doing my 2023 & following years out of sync, since there would be nothing adjusted in TTax by amending them outside of TTax to show the correction and the $360/$22 tax will still carry over, correct?

Thank you again!

[dmertz · Accepted solution]

After doing the amendments outside of TurboTax, in 2023 TurboTax simply delete the amount that TurboTax shows as an excess carried in from 2022.

The first paragraph of my first reply answers the question as to how you should have made the entries in 2020 TurboTax.

I've never seen the IRS address the situation where an beneficiary inherits an IRA that contains an excess contribution, so I have no answer to that question.  Beneficiary RMDs will eventually eliminate the excess, as would any distributions you make prior to death.  The IRS is unlikely to recognize that any excess passed to the beneficiary; the cross-checking necessary to detect that would be extraordinary.

[sugersam5]

Thank you, friend!

M_