Got it! Super clear - thanks so much, David!
@DavidS127
Here's my actual situation after reviewing all of my Roth since inception:
2009-2013: Eligible to make Roth Contributions(Total eligible contributions: 6,010)
2014-2018: Excess Roth contribution 5,900
Total Roth Account Contributions as of Dec 31 2019: 11,910
Roth Market Value, as of Dec 31st 2019: 22,800
I am trying to remove my excess roth and any earnings from 2014 - 2018 -> this means that ideally I'll have to remove 5900 (mentioned above) + any earnings from those 5900 excess roth till date. However, given the FIFO rule of Roth, even when I try to remove those 'earnings' from Roth for past years, it wont remove them before removing all my contributions (which is 11,910 as of end of 2019!)!
Question: Does IRS allow to keep earnings for past years in the Roth and not have to remove them and just have the contributions removed? Since it's impossible to 'get to the earnings piece' before removing all contributions from Roth, given the FIFO rule of removal?
Thoughts, if I dont have to worry about past earnings, let them be in roth and just remove excess 5900 roth contribution and pay 6% penalty for it this year + do any amendments when I get the 1099-R form next year? I called my brokerage and they said they wont be giving me any breakdown of earnings and contributions for past years but just remove the exact amount I tell them to remove. The problem is, even if i tell them to remove 5900 + earnings = my brokerage will use FIFO to remove contributions worth that total amount and hence 'technically' never remove the 'earnings' and so the 1099-R will have '0' earnings reported next year. Does that make sense - hopefully, I didn't confuse you.
I read this article: https://www.hrblock.com/tax-center/income/retirement-income/excess-ira-contributions/
that states "You do not need to remove any earnings made on the excess" if the extended due date has passed.
The article states, "If you remove the contribution:
- After the extended due date of your return, you will be subject to the 6% excise tax each year the excess remains in the account at the end of the year (by December 31) until it is removed. You do not need to remove any earnings made on the excess"
Also, found this:
The ordering rules of the deemed sources of the distribution and their taxability are as follows:
- regular Roth IRA contributions (never subject to tax or early withdrawal penalty)
- qualified rollover contributions, on a first-in first-out basis with the taxable portion of each conversion before the nontaxable portion for that conversion. (taxable to the extent not already recognized in income, and subject to the 10% tax if made before the 5-year holding period determined separately for each conversion)
- nontaxable portion of each conversion (not subject to income tax or to 10% early withdrawal penalty)
- repeat (2) and (3) for each conversion
- earnings on direct Roth contributions and conversions (includible in income and subject to 10% penalty)
