Excess Roth IRA Contribution Removal for tax years 2022 & 2023

[msv1]

Both my wife and I had excess Roth IRA contributions for tax year 2022 as follows:

Excess contribution - Self: $7000
Excess contribution- Spouse: $4476

I removed the excess contributions for 2022 this year in April 2024. Per my broker, as it was past the tax deadline (including extension) of Oct 15, 2023, I just need to remove excess contribution and pay 6% penalty on excess before Oct 15, 2024, tax deadline, which I plan to do shortly.

Further for tax year 2023, I again had excess contribution of $7500 in my account and $207 for my wife's Roth IRA. which I removed before tax deadline (including extension) of Oct 15, 2024.

Now all the excesses having been removed both for 2022 and 2023, my following questions relate to how to report removals and any associated penalties.

Q.1   Do I have to file amended tax returns for 2022 or just paying penalty on forms 5329 for my wife and myself sufficient? It is being suggested by certain sources online that I have to file amended tax return for 2022 and forms 5329 even when nothing is to be amended on my return itself, which does not make whole lot of logic. So, if I submit forms for myself and my wife with penalties to IRS, would it be meet IRS requirements?

Q2.  For 2023 removals, since excess removal is considered distribution in the year it is removed (2024 in this case) and would be reported on 1099X by my broker in 2025, do I need to do anything at this time (before Oct 15,2024 extended tax deadline) with respect to 2023 taxes, such as filing amended taxes for 2023 or form 5329 for 10% penalty of about $5 due to early disbursement from my wife's accounts as she is below 59 1/2?

Q3.  Any guidance on leveraging my TurboTax tools to help me sort through this and file appropriate forms.

Q 4.  Anything else that I may be missing?

[fanfare]

The proper way to file Form 5329 is attached to Form 1040-X.
Form 5329 can be mailed by itself only when you are otherwise not required to file a tax return.

If you are paying a penalty then amounts are changing and you have to adjust your tax.
The new or changed forms would be
Form 5329
Schedule 2 Line 8
The penalty goes on 1040-X Line 10.
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.

Done this way, you sign 1040-X, not 5329.

@msv1 

[msv1]

Thanks very much for a detailed reply. However, I don't understand why paying penalty would affect my taxes.  Excess Roth IRA Penalty is considered excise tax. It does not require adjustment to my taxes any way. So, my question is that is there any violation of IRS regulations in just sending completed 5329s with penalty payments without amending the tax return?

Further, what about 2023 tax return. Do I need to amend my 1040 for 2023 before Oct 15, 2024 or file everything next year with my 2024 taxes after I receive 1099Rs for myself and my wife?

Thanks again for your time and patience!

[KarenL]

You are correct that you do not need to file a Form 1040-X unless you have other changes to your tax return.  Each tax year uses a different form 5329, so make sure you use the correct one (2022, in your case). 

Wait until you receive the 1099-R forms before you amend your 2023  tax returns. The 1099-R forms you receive will (hopefully) be coded properly and likely won't require you to amend.  Since it will be a non-taxable return of your excess contribution plus your growth, only the growth will be taxable.

Another option, but it's too late if you already removed the excess, would have been to reallocate the excess to the 2024 tax year.  In the future, it might be worth discussing this option with your broker. In that case, only the growth would have needed to be removed. 

[Edited 5/10/2024:8:57 AM PST]

[fanfare]

On Form 1040-X,

Line 8 "Tax" will not change

Penalty i.e. Form 5329 goes on line 10.

Therefore Line 11 "Total Tax" will increase.

Amount you owe Line 20 depends on Line 11.

Form 1040-X becomes your new tax return.

--

I can only refer you to the INSTRUCTIONS:

When and Where To File
File Form 5329 with your 2023 Form 1040, 1040-SR,1040-NR,
or 1041 by the due date, including extensions, of your tax return.
If you don’t have to file a 2023 income tax return, complete
and file Form 5329 by itself at the time and place you would be
required to file Form 1040, 1040-SR, or 1040-NR. If you file Form
5329 by itself, then it can’t be filed electronically. Be sure to
include your address on page 1 of the form and your signature
and the date on page 2 of the form. Enclose, but don’t attach, a
check or money order payable to “United States Treasury” for
any taxes due. Write your social security number and “2023
Form 5329” on the check. For information on other payment
options, including credit or debit card payments, see the
Instructions for Form 1040 or the Instructions for Form 1040-NR,
or go to IRS.gov.
Prior tax years. If you are filing Form 5329 for a prior year, you
must use the prior year's version of the form. If you don’t have
any other changes and haven’t previously filed a federal income
tax return for the prior year, file the prior year's version of Form
5329 by itself (discussed earlier).

@msv1 

[fanfare]

"only the growth will be taxable and it will be reported on 2024's tax return."

This is incorrect.

positive earnings allocable to a 2023 excess removal go on the tax return for the year of the contribution, 2023.

You will get a 1099-R with code "P" informing you to amend your 2023 tax return.

@KarenL 

[fanfare]

I edited out the "wiggle room" comment because I don't think there is any.

@msv1 

[msv1]

Thanks to @KathyL and @fanfare for detailed and helpful responses. Since I have to pay 6% penalty on 2022 excess contributions, I was originally thinking, in my own little wisdom, about just doing forms 5329 (2022) for both me and my wife and hopefully be done with it as there was no other change for 2022. However, my broker thrown a caveat in this whole situation which has confused the heck out of me. My broker decided to withhold 10% of my wife's excess withdrawal as federal withholding. However, for mine, there was no withholding per the broker transection. So how does that change the game plan as the federal withholding for my wife will be reported on 1099-R in 2025.  So, it makes it more confusing (just for me). 

I do appreciate you all being patient with my questions as I am totally new to this and find the process overly confusing & stressful especially when breaking up growth/earnings etc. for different tax years. So any instructions broken up into steps as you would give to a 5th grader would be helpful. My questions are as follows: 

Tax Year 2022: 

1. So, under the circumstances, should I go ahead and do 5329 by itself (or amend existing return with 1040X as suggested by Fanfare)? which is preferred? How do I account for the tax withholding from my wife's 2022 excess contribution removal that would probably show up on my 1099-R in 2025. 

2. Would my 2022 turbo tax help me walk through this process?

Tax year 2023:

My original plan was to amend 2023 before Oct 15, 2024 based on my recent removals (and not wait for 1099-R for me and my wife) using TurboTax (which I assume will generate 1099-R), because I was told that If I don't do it before Oct 15, 2024, IRS may penalize me with 6% or other penalties. 

So, I continue to struggle with questions for tax year 2023 also which are as followings.

1. is it correct that I am subject to penalties etc. if I don't account for 2023 removals by amending 2023 tax return by Oct, 15, 2024? If so, what is the best recourse for 2023 tax year filings/amendment in the absence of 1099Rs that will be received next year in 2025.

2. Regardless of growth/income none of my tax liabilities change due to substantial short term/long term loss carryover on my taxes. Does this fact change anything for the process/filings, I have to do for 2023 taxes

2. For me there would be no age penalty for 2023 excess removals/gains however small removal of $207 from my wife's account may have small gains of $30-24 requiring me to pay 10% age penalty which will be under $10.  Do I still have to do 5329 for her for that small amount?

3. Again, how can I do this with turbo tax.  (step instructions would be appreciated). I wasn't aware that turbo tax allows for amended tax returns to be filed electronically but if it does for small fee, I will prefer to do that. 

I thank you all for helping. Any instructions broken into steps would be appreciated. 

[fanfare]

There are two cases and they are handled differently;

Before tax due date (including extensions)

after tax due date (including extensions);

----

return of excess contribution:

before tax filing date including extension: positive earnings allocable to the excess are included in income on 1040 Line 4b for the year of the contribution. negative earnings are ignored; in any case, for purposes of basis, consider the original requested amount as returned.

Note: You must have a) filed by tax day, or b) requested an extension of time to file by tax day to take advantage of the Oct 15 deadline.

positive earnings removed are no longer penalized 10% if you are under age 59 1/2. (eliminated in 2023)

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,
(or offset it with currently allowed contribution) .
An amended return may be needed supplying that Form 5329 since there is a 6% penalty per year on accumulating excess contributions .
Earnings stay in the Roth account.

Consult your custodian to obtain the correct removal form for each case.

--

you probably used the incorrect form or your broker did not understand what you wanted.

If tax withholding is shown on a 2024 1099-R code "P" you would get that tax back by amending 2023 tax return.

Generally tax is not withheld because your contribution is not taxable when returned.

[fanfare]

Last month I worked with another forum user in the same situation. I tried for a long time to explain this. I don't think he was attentively reading my replies.

My recommendation was to file prior year amended returns on paper, hand written using IRS.gov fillable PDF forms.

E-file of 2023 1040-X is still available.

--

How to make TurboTax do it is a completely separate topic.

Based on other forum posts, good results using TurboTax to amend is sporadic at best.

(of course, those who have no problem, do not post on the forum).

@msv1 

[msv1]

It appears there is also the issue of the amount of 6%penalty - how much is it and when exactly it needs to be paid The following are the facts and dates.

Tax year 2022 excess contribution My self - $7000 , Spouse 4450

My Excess of $7000 removed - April 24, 2024  

Spouse excess removed - May 10, 2024

So, do I have to pay 6% first with 5329 for 2022 and then again second time with 2023 amended returns even though they are being filed as we speak (before Oct 15, 2024)?

[msv1]

Additionally, For my 2023 excess contributions, my broker had me request separate corrective disbursements for amounts that were added in 2023, and Between Jan 1, 2024- April 15, 2024 to Roth IRA for Tax year 2023.

So they were removed as below -

Tax year 2023-excess removals -

For myself  (deposits made for "2023" in 2023) removed on  - April 15, 2024

For myself (deposit s made for "2023" in 2024 before April 15, 2024) removed - April 17, 2024

For spouse  (deposit made for "2023" in year 2023 before Dec 31st, 2023) - May 10, 2024.

I am not sure how this further complicates 2023 tax filing corrections. 

[fanfare]

Please review my post above of ‎05-10-2024 8:10 PM.

the 6% applies to the second case only. see Form 5329.

also, you can search the forum for other posts on how to get the amendment via Turbotax,

including how to make up the anticipated 2024 Form 1099-R for entry now, either on 1040 if you did not file yet, or on 1040-X if you already filed 1040.

@msv1 

[msv1]

Please bear with me as I am trying to understand the problem and the potential solution the best I can. I have read your post of ‎05-10-2024 8:10 PM. I am working with an after-tax deadline (oct 15, 2023) situation (the second case). I will be paying 6% penalty by amending 2022 return (correct?). I'm doing that presently.  However, my confusion is related to when I amend 2023 return later this year (but before Oct 15, 2024). Am I paying 6% again with "2023 amendment" also or penalty paid with "2022 amendment" is the only time I pay the penalty? From your response mentioned above, it appears that I am done with penalties after amending 2022 return. I believe it to be the case as well.

So, in case if I am not paying the penalty again with 2023 amendment, my taxes for 2023 are not affected at all as you say 10% penalty is not there anymore, and my gains on the 2023 contributions removed are offset by my carry over losses. So if there is no change and I am not paying additional penalties, do I still have amend 2023 return. In such case, would it make sense to wait for 1099-R (with P designations) until next year. I will wait for your response. Thanks for your time and patience.

@fanfare

[fanfare]

my confusion is related to when I amend 2023 return"

When did you e-File your 2023 tax return ? See a),b) above for the rule to take advantage of the Oct Deadline.

You are confused.

Oct is not the deadline to amend. It is the deadline to remove the excess plus earnings.

If you did not file by Tax day, and you don't have an extension, you missed the opportunity, and you cannot remove earnings on a 2023 excess. That would be bad. 

If you did file 1040 by Tax Day, and you removed earnings after Tax Day, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. (See Note: IRS Pub 590-A Page 30.)

The 6% penalty applies to case 2 only

"my gains on the 2023 contributions removed are offset by my carry over losses."

You are confused. There is no way to offset positive earning allocable to excess removal, you must report as 2023 income.

"would it make sense to wait for 1099-R (with P designations)"

if A) you already reported allocable earnings, or B) the earnings are negative, the 1099-R code P ordinarily would go in the circular file.

HOWEVER, if 1099-R shows federal withholding, it must be reported and  attached to the 1040-X to get your tax withheld back.

If you amend now , the withholding you report would be greater than the total currently seen by IRS. That would probably cause IRS to refuse to refund that withholding.

@msv1