2019 Roth IRA Excess Contribution

[chris39]

I contributed $6000 to my Roth IRA in 2019. It turns out I wasn't eligible to contribute any for 2019. I had my broker move the excess to my 2020 contribution (for which I am eligible) on Sept 10th 2020.  My account is worth less than it was before I contributed the excess amount and my broker rolled over $5100.

• Do I still need to withdraw $900 to correct last year's excess contribution?
• How does the 10% payment on earnings work? I accumulated interest and dividends since the excess contribution.
  • Do I need to pay the 10% on those despite the entire account being worth less or will I not have any penalty on earnings?
  • Does the earnings penalty only apply to earnings between the excess contribution date and the date it's corrected, the entire year or something else?
  • Or is the 10% on earnings ignored when you are paying the 6% on the excess at this point in time?

[macuser_22]

Because the 2019 excess plus any was not withdrawn before the due date of the 2019 tax return you will owe a 6% penalty on that excess for 2019.  Having it applied to a later year is the same as removing it but does not eliminate the 6% penalty.

Since $900 of the excess still remains in the account, you must distribute that before the end of 2020 to avoid another 6% penalty for 2020.  There will be no 2020 tax on that distribution since it is your own contribution.

Paying the 6% penalty negates having to remove any earnings.

[fanfare]

here's how it works.

You tell the custodian what you want to do.

the custodian calculates your earnings on that $6,000 plus or minus and moves the result so adjusted.

meanwhile you report on your tax return the original amount you put in as having been removed.

Too late now since you already had something done.

Call custodian to determine if your action was treated as a removal of excess as I describe.

[Ichinco]

Can you update us on what you did? I kind of have the same issue, contributed to my 2020 Roth but MAGI was way to high to put any money in it. Not sure what to do and there is not information out about this issue.

[macuser_22]

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@Ichinco wrote:

Can you update us on what you did? I kind of have the same issue, contributed to my 2020 Roth but MAGI was way to high to put any money in it. Not sure what to do and there is not information out about this issue.

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The above comments are referring to a *2019* excess contribution.   Your situation is about a *2020* excess which is different.

You have until April 15 to remove the excess plus earnings.     Ask the IRA trustee to do a "return of contributions" distribution plus earnings.    You should receive a 2021 1099-R next year to report it.    Only the earnings (if any) will be taxable.     Do not just remove the excess with a normal distribution or the 1099-R will have the wrong codes.

If you file a timely extension to file before April 15, then you will have until Oct 15, to remove the excess.