2018 excess Roth contribution after 12/31 deadline

Forum|Forum|6 years ago
February 7, 2020
12 replies
75 views

My husband and I contributed to a Roth IRA in 2018 and 2019. We realized on 1/31/2020 that we shouldn’t have contributed to either. We understand the 2019 can be converted to a regular IRA and then back door converted back to a Roth. However, what do we do to fix the 2018? Everything I read says we should have fixed by 10/15/2019. What should financial institution do for the 2018 funds? What should we do from a tax standpoint? Please help with the most cost effective solution! I understand that we will owe a 6% penalty for 2 years, is that right? Also, are we gonna be hit with 10% early withdrawal? We are under 40years old. Trying to determine best way to try to keep all in a retirement fund of some sort if possible!

Not A Product Question

DianeC958

Alumni - Intuit

You will need first to amend your 2018 tax return to indicate that you overcontributed to the Roth IRA. When you do this the program will prepare a form 8606 as part of your return showing the overcontribution.

You will need to carry this information to your 2019 return and also have the form 8606 showing the overcontribution amounts.

Then you need to withdraw the excess contributions and turn the money into Back Door Roth IRA's to have the tax benefits when you retire.

Then in 2020 when you receive the 1099-Rs for the withdrawals the form 8606 helps to show the IRS that the withdrawals are not taxable or to subject to the 10% penalty for early withdrawal.

Link to how to amend prior years' tax returns in TurboTax.

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Elsie3Author

Level 2

Can we carry over into 2019 even if we are not eligible for a ROth in 2019either? Also, what are the penalties? Will we owe the 6%?

We currently have an excess Roth in 2018 and 2019. Is it possible to carry the 2018 Roth into 2019, then recharacterize it to a traditional IRA to avoid the 6% penalty from 2018 passing the 12/31 deadline...and then carry the 2019 Roth into 2020 and then recharacterize it to a traditional IRA too?

dmertz

Level 15

No recharacterization of the 2018 contribution is permitted after October 15, 2019. You'll owe a 6% penalty on the 2018 excess with your 2018 amendment and, since the 2018 excess was still in the account, for 2020 you'll owe another 6% penalty on the 2018 excess shown on your 2019 Form 5329. If you will again be ineligible for a Roth IRA contribution in 2020 you'll have to resolve the 2018 excess by making a regular distribution of the exact amount of the 2018 excess, with no adjustment for earnings or loss; any earnings can remain in the account. This regular distribution will be nontaxable because it is a distribution of contribution basis.

The excess contribution for 2019 can be resolved by a return of excess contribution before the due date of your 2019 tax return as you mentioned, and must include attributable earnings or loss.