@kate3116 wrote:
The following part of your answer is confusing to me:
"Since the distribution of the excess is a normal distribution and not a "return of contribution" distribution, only the contribution amount itself needs to be removed. The earnings can stay in the account because the penalty has been paid on the 5329 form."
1) Do I not have to pay the 6% penalty on the earnings from the excess contributions? There is no penalty at all on the earnings?
2) Can I keep the earnings in the account and just withdraw the contributions?
"You can always remove your own prior contributions (not previously removed) tax and penalty free."
3) When I withdraw the contributions, I don't pay taxes or a penalty on that withdrawal?
4) If I were to remove the earnings as well, I would have to pay tax and penalty on the earnings on my 2020 return?
Thank you so much in advance!
If you remove the excess AND earnings BEFORE the due date of the tax return (or extended due date) then there is no penalty. If you miss that due date then you will owe the 6% penalty on the *excess* contribution for each year that it remains in the account. Any earnings attributed that that excess stay in the account since the penalty on the excess has been paid.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
