Adjusted 1 moth late for Excess of Contribution ROTH IRA.

[ndy856]

After doing all my total of my 3 ROTH accounts,  I took a withdraw from one ROTH IRA account in May 2019 after I filled my 2018 tax return in April 2019.  In Feb 2020 I received the 2019  form 1099R showing a taxable amount, distribution and code J P in BOx 7.  At the time of realizing that I exceed the $5500 limit and start to withdraw, I was already 1 month late.

Without filing an amended 2018 return and now filling this 1099-R,  will I be penalized 10% (early withdraw before age 59) or will I be penalized 6% (excess contribution even it's only there excess of 1 month, not a whole year) ?  if so, will I get IRS letter of penalties several months later? 

any other options I have?

[macuser_22]

A 2019 1099-R with a code "P" or "JP" in box 7 is taxable in 2018, not 2019

You must amend 2018 to report it. The 2018 1099-R interview will say that code P means "Return of contribution taxable in 2017", but the interview will ask if this it a 2018 1099-R or a 2019 1099-R. Say 2019 and the "taxable in 2017" becomes "taxable in 2018" (the year advances by 1 each year).

The returned contribution is not taxable, but any earnings reported in box 2a are taxable and also subject to an 10% penalty of you are under age 59 1/2.

[ndy856]

wait, the 10% penalty will only be on the taxable amount (box 2a) ? and no penalty will be on the Gross Distribution (box1)  the $ amount that I withdrew?

[macuser_22]

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@ndy856 wrote:

wait, the 10% penalty will only be on the taxable amount (box 2a) ? and no penalty will be on the Gross Distribution (box1)  the $ amount that I withdrew?

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Correct.  Your original contribution is being returned to you as if it never happened.   Only the earnings are taxable and subject to an early distribution penalty if under age 59 1/2.

[ndy856]

Ok great. This 10% penalty hurts way less than the 6% penalty because it's 6% of Excess Contribution (Principal basis not the gains)  and per year.  So if it takes the IRS to find out 5 years later about it, then it's 6% of that  x5. 

Glad I caught it & take corrective action. 

[macuser_22]

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@ndy856 wrote:

Ok great. This 10% penalty hurts way less than the 6% penalty because it's 6% of Excess Contribution (Principal basis not the gains)  and per year.  So if it takes the IRS to find out 5 years later about it, then it's 6% of that  x5. 

Glad I caught it & take corrective action. 

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Actually some people prefer the 6% penalty each year on the  excess amount if it is earning 12% interest.   When they finally remove it with a regular distribution, since the 6% penalty was paid,  the interest (earnings) stay in the account and do not need to be removed - only the original contribution amount must be removed to end the annual 6% penalty.

[ndy856]

hmm, that's a good strategy too.  and if they do so before April 15 deadline, then they won't have to be penalized 10% on that 6% interest gains earnings.  Most ROTH custodial give you the option to choose which contribution year to withdraw the excess from.