Need help with correcting excess roth IRA contribution for 2022

[Anonymous]

I need help with correcting my excess Roth IRA contribution for the 2022 tax year. I contributed 6k to my Roth IRA in 2022 but recently discovered that my MAGI exceeded the limits, making me ineligible for any contribution that year. Today's date is Nov 19, 2023, and I have not taken any corrective action yet. I understand that I am facing a penalty (6%?) for not withdrawing the excess contribution by the deadline.

1. How do I correctly calculate and report the penalty I owe for the 2022 and 2023 tax years?
2. When using TurboTax, which service level should I select to ensure I get the necessary help with this issue?
3. Is there any additional advice for filing an amended return for 2022 to address this excess contribution?

I would appreciate any detailed instructions on how to navigate this situation using TurboTax, and whether I should directly seek assistance from a CPA outside TurboTax.

[dmertz · Accepted solution]

If you have the CD/download version of 2022 TurboTax, simply enter the $6,000 contribution that you made for 2022 and TurboTax will prepare Form 5329 with the calculation of the penalty appearing in Part IV.  If you don't have the CD/download version, you can download the 2022 Form 5329 and its instructions from the IRS and prepare it the form manually.  The form will have $6,000 on lines 23 and 24 and $360 on line 25.  See the Instructions for Form 5329 for filing instructions.

https://www.irs.gov/pub/irs-prior/f5329--2022.pdf

https://www.irs.gov/pub/irs-prior/i5329--2022.pdf

If you are ineligible to apply the excess as a 2023 Roth IRA contribution, you have until December 31, 2023 to obtain a regular distribution (not a return of contribution) of exactly $6,000 from the Roth IRA (or your entire balance in Roth IRAs, if less) to eliminate the penalty for 2023.  You'll enter the resulting code J 2023 Form 1099-R into 2023 TurboTax.  After clicking the Continue button on the page that lists the Forms 1099-R that you have entered and tell TurboTax that this $6,000 represents contribution basis carried in from 2022 (even though it was an excess contribution; if you prepared Form 5329 with the CD/download version of TurboTax and use the resulting tax file to begin your 2023 tax return this will transfer in automatically), TurboTax will prepare Form 8606 Part III showing that the distribution is nontaxable.  You'll also need to tell 2023 TurboTax that you have a $6,000 excess contribution from a prior year (if not already transferred in from your 2022 tax file) and TurboTax will prepare 2023 Form 5329 showing $6,000 on line 18, the $6,000 distribution on lines 20 and 21, and $0 on lines 22 and 25.

[Mike9241]

@dmertz what about withdrawal of any earnings on the excess contribution?

[fanfare]

@Mike9241 

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.

[dmertz · Accepted solution]

fanfare is correct.  Earnings are only required to be distributed on a return of contribution before the due-date of the tax return, including extensions, a deadline which has passed in this case.  Paying a 6% penalty and requiring the earnings to be distributed are mutually exclusive.

Consider the case where an excess contribution can be applied as a contribution for the following year.  If that happens, there is no requirement that any earnings be distributed.  Doing so is equivalent to taking the regular distribution of exactly the excess (no earnings) and using those funds to make a new contribution.

[Anonymous]

I have always used TurboTax's online platform instead of the CD/downloadable version, and I am not eligible to contribute to a Roth IRA. This year, I initially funded my Roth account, but just last week I recharacterized my 6.5k contribution to my Traditional IRA (phew).

Should I initiate a return of my excess IRA contributions immediately [1], or would it be better to wait until the online version of TurboTax becomes available next month? Additionally, I want to confirm that the penalty for excess contributions is 6%, since I do not qualify for Roth IRAs. And will I also be subject any tax on the excess amount contributed?

Thank you all for giving me clarify to what I'm looking at.

[1] https://www.fidelity.com/retirement-ira/excess-ira-contributions

[dmertz · Accepted solution]

As I previously explained, you already have a 6%, $360 penalty for 2022 for which you must file 2022 Form 5329.

Your excess $6,000 2022 contribution must be corrected by obtaining a regular distribution of $6,000, not a return of contribution.  Tell the Roth IRA custodian nothing about this being a distribution to correct an excess contribution made in 2022.  This distribution must be obtained before the end of 2023 to avoid another 6%, $360 penalty for 2023, so the sooner the better so that you don't miss that deadline.  Because this distribution will be nontaxable, there is no conceivable reason to wait until the online version of 2023 TurboTax is available before you obtain this regular distribution.

By doing the recharacterization of your 2023 contribution, that contribution will be treated as if it has always been a traditional IRA contribution, no penalty.  However, in 2023 TurboTax you'll enter the $6,500 Roth IRA contribution you originally made, then indicate that you "switched" this $6,500 to be a traditional IRA contribution.  Doing so will cause TurboTax to prompt you to provide the required explanation statement.

[Anonymous]

Thank you team, much appreciate it.