Depending on the circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a Roth IRA by several methods; however, for you and given the amount at issue, perhaps the best option is to make a corrective distribution.
The corrective distribution is not taxable, and it eliminates the 6% excise tax entirely. Income earned on the excess contribution while it was in the Roth IRA is also distributable and is taxable. An early-distribution penalty may be imposed on the distributed earnings if no exceptions apply.
At this point, there is no need to amend your 2021 tax return. If you decide to make the corrective distribution, such distribution will take place in 2022 and therefore, you will receive a 1099-R (or similar document) showing the 2022 distribution. When you prepare your 2022 tax return, you will see pages in TurboTax that will ask you whether you had withdrawn the excess contribution by the due date. If you indicate that you withdrew the excess contribution, TurboTax will not create Form 5329. If you do not withdraw the excess contribution, then TurboTax will generate Form 5329 which shows the excise tax imposed on the over contribution amount. The 1099-R should show the excess contribution withdrawal to the IRS.
Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.
To avoid the 6% tax on excess contributions, you must withdraw:
- the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
- any income earned on the excess contribution.
@zd11
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
