Can I do a return of excess contribution on a current year Roth IRA contribution to correct for a previous year's excess contribution?

[ck2019]

I have $170 in excess contributions from 2018 that I wasn't aware of until recently after amending my 2018 tax return. I already contributed the full $6,000 allowable for tax years 2019 and 2020 to my Roth IRA (I am within the MAGI limits for both 2019 and 2020). From my research, it seems you can "absorb" the $170 in excess contributions into a future year's contribution by basically reducing your contribution limit by that amount (so basically limiting myself to $5,830 in contributions for a given year, assuming the maximum limit is $6,000). However, since I already made the $6,000 contribution for both 2019 and 2020, could I technically do a return of contribution of $170 from my 2020 Roth IRA contributions to "undo" that part of the contribution, and then allow the 2018 excess contribution to be absorbed into my 2020 Roth IRA contributions? I am currently at a loss for my 2020 contributions, so this would seem to be the most beneficial to avoid having to pay the 6% excess contribution penalty for 2020 (and avoiding the 10% early withdrawal penalty if I do a regular distribution of the $170). Or would I have to wait until 2021 to "absorb" the contribution and simply limit myself to contributing $5,830 in the first place?

Note that I did the computation for 2019, and since I had a substantial gain in the computation period, I deemed that it wouldn't be worth it for 2019. I can just eat the 6% penalty for 2019, so I'm now wondering what to do about my 2020 taxes to get this fixed as soon as possible.

Sorry if this seems like a roundabout question. Thanks in advance for any help with this!

[macuser_22]

Since the time limit to remove the 2018 excess as a "return of contribution" expired on April 15 , 2019, that con no longer be done.   You you owe a 6% penalty on the excess for tax year 2018 and it not already filed on your 2018 tax return then  you need to amend 201 to add the 5329 form and pay the penalty.

Because you also did not remove that excess by the end of 2019 you also must report the excess on your 2019 tax return and pay and additional 6% penalty on a 2019 5329 form.

You have until Dec 31, 2020 to remove the excess as a "normal" distribution, not a "return of contribution" in order to avoid another 2020 6% penalty.     You cannot apply that excess to the 2020 contribution  if you are already at the limit.   You can leave is in the Roth as long as you want if you pay the 6% penalty each year   (some people do that intentionally  when the excess is invested and is earning more then the 6% penalty .)

[macuser_22]

Above post edited to correct a typo in the dates.

[ck2019]

Thanks so much for your guidance! I have accepted that I will need to pay the 6% penalty for 2018 and again for 2019. However, if I take an ordinary distribution on the $170 in 2020, would that not be subject to the 10% early withdrawal penalty? I would be better off just paying the 6% again in 2020 and letting it get absorbed into my 2021 contributions in that case, right? (That would save a bit of extra headache with the extra 1099-R form too.)

And since I am already at the contribution limit for 2020, can I simply "cancel" part of the 2020 contribution using a return of contribution to make room for the 2018 excess contribution to be absorbed (which would allow more of my money to stay in the Roth since I am currently at a loss for my 2020 contributions)? Or is that not allowed per IRS code?

[macuser_22]

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@ck2019 wrote:

 would that not be subject to the 10% early withdrawal penalty? I would be better off just paying the 6% again in 2020

And since I am already at the contribution limit for 2020, can I simply "cancel" part of the 2020

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#1) No, there is no 10% penalty or tax when removing your own contribution.   The TurboTax interviews for Roth distributions asks for your prior contributions.    You can always remove your contributions at any time that are penalty and tax free.

#2 That makes no sense to me to get either a "return of 2020 contributions" and apply the excess or just distribute the excess.    They both will result in a 2020 1099-R that you will receive in  2021.   Why complicate it with 2 transactions when simply removing the excess is all that is needed

Either way you are removing the excess but that leaves more room for financial institution reporting errors.  - Keep it simple..

[ck2019]

Got it. I think I may have been trying to overcomplicate things since I thought a 10% penalty would be incurred, and I was trying to keep as much money as possible in the IRA. Good to know that the 10% penalty wouldn't apply on the ordinary distribution of the contribution, even with it technically being an excess contribution. Thanks for your help!

[macuser_22]

The 10% penalty only applies to any earnings that are removed.

[dmertz · Accepted solution]

You could obtain a return of contribution of $170 of your contribution for 2019 to make room to apply as part of your 2019 contribution the excess $170 carried in from 2018, eliminating the 6% penalty for 2019 (and years beyond).  Given the recent market conditions, you might even find that the adjusted amount distributed for a returned $170 is less than $170.  However, if the adjusted amount is more because your IRA has seen overall gains since the date of the 2019 contribution, the adjusted amount distributed in excess of the $170 (the attributable gains) will be subject to income tax and early-distribution penalty.  Still, avoiding a $10 penalty on your 2019 tax return might not be worth the trouble and slightly higher potential risk of fouling up a return of contribution compared to just making a simple regular distribution in 2020.

If you do obtain a $170 return of your 2019 contribution, TurboTax isn't geared for prompting to indicate how much you had returned and instead you would just indicate the net amount of new money contributed for 2019, $5830.  TurboTax will then allow you to apply the $170 as part of your 2019 contribution.

The deadline for obtaining a return of a 2019 contribution is teh extended due date for your tax return, October 15, 2020,  (as long as you file your tax return or request a filing extension by the regular filing deadline of July 15, 2020).

[ck2019]

Great, thank you so much for your thorough response and for laying out the options! I did the calculations based on the computation periods for my 2019 and 2020 IRA contributions (assuming the returned contribution would be executed immediately), and I would have more than $170 distributed to me if I did a return of contribution for 2019, but less than $170 if for 2020 (since I have a loss on the more recently contributed money given the current market conditions). However, for simplicity sake and since it's a fairly small amount of excess contribution, I think I'll just go down the route of making a regular distribution in 2020. Thanks again!