Retirement tax questions

Opus 17 · ‎May 5, 2024

@dperrett1 wrote:

I’m still gathering data. The roth ira had the first contribution 01/01/20. I did withdraw in 2022. Worst case, I over contributed in 2020 through 2023. I plan to adjust 2024 to the contribution limit. How far do I need to go back and how do I file?

It sounds like you have to go back to your 2020 tax return.

First, it's important to understand there are two ways to remove excess contributions to stop paying a penalty. There is a special procedure where you remove the excess before the tax deadline for the year in which the excess occurred. You must also remove any earnings attributed to the excess. You report the earnings as taxable income, but the contribution is not reported because it is if you never made it.

If you miss the deadline, you can remove the excess by making a regular withdrawal. In this case the withdrawal is not taxable (because withdrawals of Roth contributions are never taxable) and you ignore the earnings (they can be left in the account) but you still have to pay any prior penalties.

Let's start with 2020. If you made excess contributions for 2020, you had until May 17, 2021 to remove them by the special procedure. If you did not, you need to file an amended return for 2020 that reports the excess and pays a 6% penalty (this is on form 5329.)

Then for 2021, if you also made excess contributions, that must be reported on your 2021 tax return. If not, you must file an amended 2021 return that reports the excess and pays a 6% penalty on the cumulative excess (the new amount from 2021 plus the carryover from 2020) on form 5329.

If you made a withdrawal in 2022, you need to determine if that was a regular withdrawal, or a special "removal of excess contribution with earnings" (you must tell the bank in advance), and if you made the withdrawal before or after April 17, 2023.

If it was a special removal of excess with earnings done before the tax deadline, then you were required to report the earnings on your 2022 tax return, and you still needed to report the carryover excess from 2020 and 2021 and pay the 6%.
If it was a regular withdrawal made in 2022, that is reported on your 2022 return in the normal way and is not taxable as long as you are withdrawing contributions but not earnings.

Let's assume the withdrawal in 2022 was a regular withdrawal. On your 2022 tax return, you should report the withdrawal from form 1099-R. If you had a form 5329 from 2021, that information would carry over, and the withdrawal would reduce the carryover excess from 2020 and 2021. Since you did not report the excess in 2020 and 2021, you will also need to amend your 2022 return using the information from your amended 2020 and 2021 returns. You will have a form 5329 that will report the carryforward excess contributions, any new excess contributions (if you made any), and the withdrawal, and will calculate a 6% penalty on any remaining excess carryforward.

Then for 2023 we need to know if you already filed, and if not, did you get an extension.

If you did not file and you have an extension, then follow these steps.

Contact the IRA bank and ask for a withdrawal of your 2023 excess contributions plus their earnings. (You can't withdraw the excess from 2020-2022 using this procedure, it's too late for that.)
Prepare your 2023 tax return. Report the Roth IRA contribution, and when Turbotax tells you that you have an excess contribution and asks what you will do, say you will remove the excess before the deadline. Create a fake 1099-R for the withdrawal of excess. Report the total withdrawal in box 1 and the earnings amount in box 2a. Use letter codes P and J for box 7. The withdrawn earnings will be taxable but not the contribution.
If you still have a carryforward excess contribution on form 5329 form 2022 after amending, you must include form 5329 on your 2023 return to pay a 6% penalty on the carryover excess contribution amount from 2020-2022. (Remember that in 2024, it is too late to perform the special removal of excess contribution procedure for the excess amounts you contributed prior to 2023.)
Then, sometime in 2024 (before 12/31/24), make a regular withdrawal of the total remaining carryfoward amount of excess contributions as shown on your 2023 form 5329. This is a regular withdrawal and should be non-taxable as long as you only withdraw contributions and not earnings.
When you file your 2024 return, you will report the withdrawal, which, in combination with information from your 2023 form 5329, will remove the excess from your account and stop the 6% penalties.

If you already filed, or did not file but don't have an extension, follow these steps.

File your 2023 tax return using the information from form 5329 of your 2022 return. Report any new excess contributions. You will pay a 6% penalty on the cumulative total of excess contributions going all the way back to 2020, minus any withdrawals made in 2022, depending on how they were made.
Sometime in 2024 (before 12/31/24), make a regular withdrawal of the total carryfoward amount of excess contributions as shown on your 2023 form 5329. This is a regular withdrawal and should be non-taxable as long as you only withdraw contributions and not earnings.
When you file your 2024 return, you will report the withdrawal, which, in combination with information from your 2023 form 5329, will remove the excess from your account and stop the 6% penalties.