excess contribution to IRA

[JGH1976]

I retired and no longer earn wages. Yet I still made contributions to my traditional IRA in 2020 and 2021. I realized my mistake and withdrew the excess contributions on 02/14/2023. What should I do now? I need your advice. Thanks.

[fanfare · Accepted solution]

you have to file 2020, 2023 and 2023 amendments with 2020 Form 5329 and with 2021 Form 5329 showing the excess and paying the penalty

your 2023 Form 5329 will show the excess resolved  by removal since you did it in 2023.

-

return of excess contribution:

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,
(or offset it with currently allowed contribution) .

Earnings stay in the Roth account.

@JGH1976 

[JGH1976]

Thanks for your clear and quick answer!

I wonder if I can do the amendments using Turbotax software, or do I have to do it manually?

[fanfare · Accepted solution]

If you are a desktop program user and still have the sofware installed for those years, you can use it,

if you are an Online user, you have to ask TurboTax Support to give you software for 2020 and 2021.

OTHERWISE,

You must be very familiar with Form 1040-X, or able fo become familiar quickly,  to do it manually.

The penalty from Form 5329 goes on Form 1040-X line 10. Col B. 

adjust the subsequent lines  11-20 to show that you owe that much more money.

When mailing 1040-X, do not include your old 1040 nor your revised 1040 because the Form 1040-X reflects any changes there and becomes your new tax return.

Therefor your amendment is two forms, Form 1040-X and Form 5329.

@JGH1976 

[fanfare · Accepted solution]

note that your 2021 Form 5329 will show a carry forward from 2020,

so you will pay the second 6% on 2021 excess  twice, and the  first 6% on 2020 excess three times.

[JGH1976]

Thank you so much for your thorough and complete answer! I am on my way to amending my tax right away. 

[JGH1976]

I open my 2021 TurboTax CD version and start to amend the return.

It shows me a list of items I can change, such as W2, 1098-T, ..., Other tax situations, etc. I don't know which one to select in order to fix my excess IRA contributions.

[fanfare · Accepted solution]

In Forms mode, open up a "Form 5329"

@JGH1976 

[fanfare · Accepted solution]

This reminds me,

when paper filing, for this situation,

Schedule 2 Part II is also a new-or-changed form that should be included with Form 1040-X.

@JGH1976 

[JGH1976]

Dear fanfare:

It's done! Thank you so much. 

JGH1976

[JGH1976]

Dear fanfare:

Here are the facts: 

(1) I retired in 2011 and have no earned income since then.

(2) In 2020, I made a $750 excessive IRA contribution; in 2021, a $6270 excessive IRA contribution. (I have Form 5498 for both years)

(3) On 02/14/2023, when I was 62 years old, I withdrew all the excessive contribution $7020. According to my broker, I earned $750 on my excessive contribution. I did not have 1099-R reflecting the withdrawal until January 2024.

(4) On 01/06/2024,  I received the corresponding 1099-R, which shows:

Gross distribution $29,227.70

Taxable amount $22,207.70 

And the difference between the two is $7020

Q: how do I report excessive amount $7020 using 2023 TurboTax?

Note: Last August I asked for your help. But I did not file an amended return because I did not have the 1099-R showing the withdrawal yet at that time.

[fanfare · Accepted solution]

You need to post the box 7 codes to know what the brokerage did.

Also,the "taxable amount not determined" should be checked, please confirm.

--

It's too coincidental that

A) you made $750 earnings on contribution of $750 + $6,270 = $7020,

and

B) the distribution should be $7020 since 02/14/2023 is after the due date of your 2021 tax return

Maybe you misunderstood what the broker was trying to tell you.

--

So,

C) where did the $29, 227.70 in Box 1 come from?

Did you close out the IRA ?

@JGH1976 

[fanfare]

I corrected some errors in the reply above.

@JGH1976 

[JGH1976]

First, thank you for your prompt reply.

Yes, code 7 was in Box 7, and the "taxable amount not determined" was checked:

2b Taxable amount not determined (X)

7 Distribution code(s) 7

IRA/SEP/SIMPLE (X)

Regarding (A)&(B): Yes, for sure, I will call broker again to clarify the answer they gave me.

As for (C):

In addition to $7020, I withdraw $22,207.70 temporarily for some personal use and then rollover the same amount of $22,207.70 back to the same account within 4 weeks.

[fanfare · Accepted solution]

The instructions above, spread out over several posts, and revised, still apply.

(if it was confusing before, that's because there were errors. I think it is correct now ! )

Replace text "Roth IRA" with " Traditional IRA ".

You will have to amend three returns, 2020, 2021 and 2022 to include form 5329 Part III.

Then have TurboTax add 2023 Form 5329 Part III to your 2023 tax return.

The 2023 return resolves your excess contribution issue, since you removed the excess in 2023 . There is no penalty.

After that, you'll have to enter onto  2023  the 1099-R as received..

Tell TurboTax what you did with the taxable amount (rollover).