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C321
Level 1

Ineligible 2019 Roth IRA Contribution

In Jan 2020 I mistakenly contributed to a 2019 Roth IRA without realizing I was ineligible to do so. I only just discovered this while re-characterizing some other (2020) contributions. I spoke to the broker and understand that I should withdraw contributions and earnings (in 2021) and there will be a 10% penalty and a 6% penalty but my questions are:

  1. Do I need to amend a previous years return and if so which one (2019 or 2020)?
  2. Can I wait until completing my 2021 taxes to correct this / report this / pay any fees penalties?
  3. Can all of this be done through Turbo Tax? If so how!?

Any help would be appreciated!

3 Replies
macuser_22
Level 15

Ineligible 2019 Roth IRA Contribution


@C321 wrote:

In Jan 2020 I mistakenly contributed to a 2019 Roth IRA without realizing I was ineligible to do so. I only just discovered this while re-characterizing some other (2020) contributions. I spoke to the broker and understand that I should withdraw contributions and earnings (in 2021) and there will be a 10% penalty and a 6% penalty but my questions are:

  1. Do I need to amend a previous years return and if so which one (2019 or 2020)?
  2. Can I wait until completing my 2021 taxes to correct this / report this / pay any fees penalties?
  3. Can all of this be done through Turbo Tax? If so how!?

Any help would be appreciated!


If a 2019 contribution then 2019 must be amended.   The broker is wrong though, you only remove the excess plus earnings if it was timely removed before the due date of the 2019 tax return, in which case there would be no penalty but the earnings would be taxable.     Since that was not done, then the excess must sill be removed and a 6% penalty paid on the excess, but the earnings stay in the account (the 6% penalty allows that).

 

The bad news, it the 6% penalty repeats each year until removed so in addition of amended 2019 and reporting the 6% on a 2019 5329 form, you must also amend 2020 and do the same thing with another 2020 5329 form an 6% penalty.    If removed in 2021 then there is no 2021 penalty.     There is also no 10% (early distribution) penalty or tax on the 2020 distribution since it is just removing yiur own prior contribution that is always tax and penalty free.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
C321
Level 1

Ineligible 2019 Roth IRA Contribution

Thank you so much for your help! Just to be clear, when you state remove the 'excess' only and not the earnings, you mean the original contribution? And when you say remove them, do I sell them (convert to cash) and then remove from the account completely? Thanks again!

macuser_22
Level 15

Ineligible 2019 Roth IRA Contribution


@C321 wrote:

Thank you so much for your help! Just to be clear, when you state remove the 'excess' only and not the earnings, you mean the original contribution? And when you say remove them, do I sell them (convert to cash) and then remove from the account completely? Thanks again!


I mean get a distribution from the IRA of the amount of the contribution that was in excess.   And yes it must be completely removed from the IRA.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
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