To answer your questions (based on my experience and how I fixed my issue:
1. Yes. You only need to remove the excess contributions. I was concerned about this too but think about it: you pay a 6% penalty on the excess. Some people think that’s worth it becaus they will make more than 6%. So no need to remove the earnings, just the excess contributions.
2. Yes. You need to amend the 2018 tax to
include the 6% penalty. Make sure you have a copy of your 2018 return. You fill in all the information on the 1040x (which should mostly be the same until you hit the part where you need to add the penalty. 6% of 5500 is $330. You will include an explanation on the amended return. Keep it simple: Amending return to include 6% penalty on excess Roth contributions. I was able to do the amended returns without the help of software/tax prep by downloading the 1040x form and form 5329 and the accompanying instructions, and following them line by line.
Send the amended return (1040x and accompanying forms) to the IRS with a check for the penalty owed and send it certified mail return receipt requested.
Note: if you are in a community property state and file MFS, you will split the $5500 excess contributions and subsequent $330 between you and your spouse evenly. Submit a community property worksheet to show the allocation. Form 8958. You will need to file amended returns for both spouses and send in two checks, each for half the amount ($165). So for each return, you claim excess contribution of $2750 and 6% of that is $165. Again, this note is only if you file Married file separately in a COMMUNITY PROPERTY STATE. I don’t know what the rules are for MFS in non community property states regarding allocation of amounts. Rules requiring penalty payment would be the same.
I did this for 2017 and 2018 and sent the amended returns in early February 2020. The checks have been deposited by the IRS, but I have received no other indication/confirmation that I did it 100% correctly.
2a. Again, no taxes on earnings, just 6% penalty on excess contributions.
2b. You amend the return to pay the 6% penalty on the contributions.
3. You will pay the 6% penalty again on your 2019 return since the excess contributions were in the account in 2019. Same amount if no additional excess contributions: $330. Whatever Vanguard sends you in 2021 will go on your return for 2020. TurboTax has this capability just make sure you use the correct level software. (See discussion regarding community property in answer 2 if applicable).
These answers are based on a lot of internet research, reading IRS publications, speaking to three TurboTax professionals, the helpful answers here from other community members, a free consultation with a CPA, and the removal of excess contributions from my own account (and not gains/earnings).
I found this to be a helpful article too:
https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning...
In order to make contributions to a roth in the future, google “back door roth”. I’d include a description here but it would be off topic and perhaps you already know.
Good luck. And I promise, it’s not as complicated as it may first seem.
