I need to amend my 2019 tax return due to excess Roth IRA contribution.

[hahns]

Hi Experts, 

I have already filed my 2019 taxes back in April 2020 but came to find out that I need to withdraw excess contribution made to Roth IRA and file an amended tax return with Form 1040X.

The total Roth IRA excess contribution I made in 2019 was $3,100 (which I reported in my 2019 tax return and paid additional taxes for). The FMV of Roth IRA account at the end of 2019 was $3,610.81. So, I requested my plan advisor to withdraw $3,620.00.  Did I make the right move here? 

Plus, if my plan advisor cannot provide me 1099-R until early 2020, what documents, numbers, and/or codes should I ask for in order to correctly fill out a substitute 1099-R to file with my amended return? 

Please help. Thank you.

@dmertz I noticed that you helped with many questions related to retirement accounts. Can you please help me too? 

[dmertz]

1. How much was your total contribution for 2019?  Was your $3,100 excess your entire Roth contribution for 2019 or did you contribute more and only $3,100 was the excess?
2. Did you explicitly request a return of contribution of $3,120 or did you request a regular distribution?
3. The FMV on December 31, 2019 is irrelevant unless that is the date that a return contribution was made.
4. What was the reason that this was an excess contribution (MAGI limit or insufficient supporting compensation)?

[hahns]

Thank you so much for your reply, @dmertz.

1. Yes. $3,100 was my total Roth contribution for 2019. The entire contribution is considered excess. 

2. I apologize for the confusion. The withdrawal request isn't officially submitted yet. I've asked to convert the securities into cash, so I can fill out a form to request a return of contribution and earnings on the contribution for 2019. To answer your question and to correct what I said earlier, I did not request a return of contribution, yet. 

3. Thank you for the information. 🙂 

4. MAGI limit. I had a capital gain in 2019 from selling a property. 

+ I believe I need to withdraw

1. Excess contribution in 2019 and ($3,100)

2. Earnings on the excess contribution ($3610.81FMV - $3,100Contribution = $510.81Earnings. Please correct me if I'm mistaken) 

For 2, should it be earnings on the excess contribution only in 2019? or earnings on the excess contribution up to today's date? 

[dmertz]

To avoid the penalty for 2019, since you had sufficient compensation to make a $3,100 IRA contribution, you have the choice of either obtaining a return of the excess contribution, with any gains on that $3,100 being subject to income tax and, if you are under age 59½ to a 10% early-distribution penalty or requesting a recharacterization of the $3,100 contribution to be a traditional IRA contribution instead.

For a return of contribution, if the entire balance in the Roth IRA consists of only the $3,100 contribution made for 2019 plus investment gains on that $3,100, you'll explicitly ask the custodian to perform a return of contribution of $3,100.  The custodian will then determine that the entire balance is due to the contribution and its investment performance and distribute the entire current balance of the account; the gains are determined as of the date of the return of contribution, so your December 31, 2019 balance has no bearing on the calculation.  You'll amend your 2019 tax return to include the income and and penalty resulting from the distribution of the gains.

If you instead request a recharacterization, the calculation of the gains is done in the same manner as for a return of contribution, but the money is moved to a traditional IRA instead of being returned to you.  You'll amend your 2019 tax return to remove the penalty on the excess Roth IRA contribution and show the $3,100 contribution as either a deductible or nondeductible traditional IRA contribution.  The gains that were obtained while in the Roth IRA become gains in the traditional IRA.

If you have made any other contributions, distributions or transfers to or from from this Roth IRA account since the date of your $3,100 contribution, the calculation of the gains is a bit more complicated.  The entire calculation is described in CFR 1.408-11:  https://www.law.cornell.edu/cfr/text/26/1.408-11

The deadline for doing either a return of contribution or a recharacterization is October 15, 2020 as long as you timely filed your tax return, otherwise the deadline was July 15, 2020.

Having the entire balance of this Roth IRA now in cash will make it easier for you to predict what the total gains will be by the date of the return of contribution or recharacterization since it will not be subject to the daily fluctuations of securities between now and then.