I am not allowed to make any direct roth IRA contributions. But by mistake I had contributed for 2016 and 2017. And when I look back at my tax returns, I never mentioned these contributions.
Last month I withdrew both my 2016 and 2017 Roth IRA contributions (along with associated gains). This means I'll be getting my1099-R next year. My question is... what is the next step?
Do I need to amend my 2016 and 2017 returns? Or can I just pay the penalty along with my 2019 return? If I have to amend, do I amend now or after I receive my 1099-R next year? Will it change my penalty if I do it this year vs next year? I was told that if I remove my excess contributions by the 2018 tax deadline, I don't have to pay penalty for the 2018 tax year.
What part of the 2016/2017 mess do I mention in my 2018 return? Do I just not mention anything and wait till next year to deal with it? Do I pay the penalty now or do I I wait till next year to pay the penalty? (6% per year that the excess is not withdrawn, plus 10% on earnings)
Please advise.
You must file 2016 and 2017 Forms 5329 to report and pay the excess contribution penalties associated with the excess contributions. On the 2016 Form 5329 you'll have a penalty of 6% of the amount that you contributed for 2016 and on the 2017 Form 5329 you'll have a penalty on 6% of the sum of the contributions made for 2016 and 2017.
You'll also have 2018 From 5329 reporting the same excess (2016 excess contribution plus 2017 excess contribution) as on the 2017 Form 5329 and pay the same amount of excess contribution penalty with your 2018 tax return.
The distribution made in 2019 will be reportable on your 2019 tax return.
These excess contributions were correctable in 2019 by a regular distribution of exactly the amount of the excess, with no adjustment for earning. The distribution of the actual excesses is not taxable because it is a distribution attributable to your contribution basis, but the earnings distributed will be taxable and potentially subject to early-distribution penalty if you have no other Roth IRA contribution or conversion basis to apply to the amount distributed in excess of the amount of the excess contributions.
The first paragraph was helpful. But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline.
You did *not* receive distributions of the excess contributions before the dues dates of your 2016 and 2017 tax returns, respectively. Because these excess contributions were not corrected before the end of 2018, you owe the same penalty for 2018 as you owe for 2017. Excess contributions corrected after the due date of your tax return are only corrected for the tax year in which the distribution of the excess occurs and subsequent years.
I've added to my answer describing how these excess contributions should have been corrected in 2019.
"But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline."
That only applies to the year in which the excess contribution was made - in this case, *2016* that had to be withdrawn before the 2016 due date (April 15, 2017). After that, the 2016 excess must be removed before the end of the next tax year (Dec. 31, 2017) to avoid the 2017 repeating penalty - the same thing applies to the 2017 excess contribution had to be removed before Dex 31, 2018 to avoid the 2018 penalty.
You now have (had) until Dec. 31 2019 to remove all excess to avoid the 2019 penalty (that you did with the 2019 distribution).
I just got off the phone with the turbotax CPA, and she says I don't have to amend previous returns. Just wait till I get the 1099-R next year and pay the penalty along with my 2019 return. But you guys are saying I have to amend 2016/2017 and attach Form 5329 for each?
Who is correct?
Since the excess was removed in 2019, there will be *no* 2019 penalty to pay at all. It is not possible to report and pay a prior years penalty on a 2019 tax return.
A 2017 penalty can *only* can only be reported and paid on a 2017 5329 form, likewise for a 2018 penalty.
Either whoever you talked to did not understand the situation, that this is not a 2018 contribution removed in 2019, or they answered incorrectly.
IRS 5329 instructions:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i5329.pdf">https://www.irs.gov/pub/irs-pdf/i5329.pdf</a>
"Prior tax years. If you are filing Form
5329 for a prior year, you must use the
prior year's version of the form. If you
don’t have any other changes and
haven’t previously filed a federal income
tax return for the prior year, file the prior
year's version of Form 5329 by itself
(discussed earlier). If you have other
changes, file Form 5329 for the prior
year with Form 1040X, Amended U.S.
Individual Income Tax Return."
Because, there will be "other changes" - the added penalty and overall tax due - amending is necessary.
Okay. You sound like you know what you are talking about. Is this something I can do on turbotax or should I just go to a CPA?
For the 2016/2017 amendments, is it just the 5329 form, or does the amendment involve other complicated forms?
CPAs are often not well versed in the parts of the tax code involving less common retirement-account situations.
Assuming that it doesn't affect any other part of your 2016 and 2017 tax returns, such as a mistakenly haven taken Retirement Savings Contributions Credit based on these contributions (it appears that you did not), you might be able to file the 2016 and 2017 Forms 5329 stand-alone, but the IRS sometimes asks that you include Form 1040X and Schedule 4 to show this change to Other taxes and to provide explanation. Either way you'll need to pay the penalty calculated on each of these Forms 5329.
You'll file your 2018 Form 5329 with your 2018 tax return and the penalty on that form will be included in determining your refund or balance due.
With your 2019 tax return you have 2019 Form 8606 Part III reporting the regular distribution and applying your Roth IRA contribution and possibly Roth conversion basis to determine the taxable amount, if any. You'll also have a 2019 Form 5329 reporting this distribution as correcting the excess carried from 2018 into 2019, leaving you with $0 of excess and $0 of penalty.
If you want to try filing the 2016/2017 5329's as a stand-alone form without amending then you can get the blank 2016/2017 5329 here:
2016 Form: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/f5329--2016.pdf">https://www.irs.gov/pub/irs-prior/f5329--2016.pdf</a>
2017 Form: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/f5329--2017.pdf">https://www.irs.gov/pub/irs-prior/f5329--2017.pdf</a>
2016 Instructions: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/i5329--2016.pdf">https://www.irs.gov/pub/irs-prior/i5329--2016.pdf</a>
2017 Instructions: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/i5329--2017.pdf">https://www.irs.gov/pub/irs-prior/i5329--2017.pdf</a>
Where to mail: <a rel="nofollow" target="_blank" href="https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040">https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040</a>
I had a question about the 5329 - Do I have to pay the 10% penalty on the earnings for every year I file the 5329
For example, I contributed $3000 towards 2016 Roth IRA and $4000 towards 2017 Roth IRA. When I withdrew the amount in 2019, there was a net profit of $300.
When and how am I paying the 10% penalty on earnings?
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.
If the earnings were/are aslo removed, and the 2019 1099-R amount is (or will be) the total contribution plus the earnings then any amount distributed in 2019 that exceeds your own prior total contributions (including the excess contributions) will be taxable in 2019 and subject to the 10% penalty if under age 59 1/2.
You can always remove your own prior contributions (not previously removed) tax and penalty free.
On the 5329 you only enter the excess contribution amount, not any earnings.
If it's been less than 60 days since the distribution from the Roth IRA, as long and you have not done an indirect rollover of an IRA distribution in the 12 months preceding this distribution and will not do another indirect rollover of any other distribution made in the 12 months following this distribution, you can roll back into the Roth IRA the portion that was not necessary to be distributed.
We are assuming that the Roth IRA custodian handled this correctly and will be reporting this as a regular distribution, not a return of contribution before the due date of your 2018 tax return because you apparently made no contribution for 2018 that would be eligible for such a return of contribution. However, some IRA custodians (particularly banks) are somewhat clueless with regard to proper procedures and will sometimes make a "return of contribution" when no contribution for the year was actually made. That often results in needing to file a substitute Form 1099-R (Form 4852) to report the type of distribution that was actually made. (If it doesn't qualify as a return of contribution before the due date of the tax return, it's a regular distribution no matter what the Form 1099-R provided by the payer says.)
I am having a similar problem as the original poster and have found the responses to be very helpful. Thank you, @macuser_22 and @dmertz. (I posted my own question regarding this situation yesterday Excess Contributions Roth IRA Married Filing Separately)
I think I am finally starting to grasp how to fix this mess.
I am working on withdrawing my excess contributions for 2017 and 2018 now. I am recharacterizing 2019 contributions to avoid the excess.
I will go back and amend my 2017 and 2018 to claim the penalty for the excess contributions for those years and include the penalty for those years in my 2019 taxes.
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!
@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.
I have similar case.
For Roth IRA excess contribution ($6500) made in Jan 17, 2017 (at age 58, March 31, 2017 turned to 59), removed contribution with earnings in March 2021:
Q1: Do I pay 10% early withdrawn penalty for each year plus 6% penalty for over 5 years?
Q2: Do I need to amend tax return1040 for 2017, 2018,2019,2020, 2021 to pay taxes on earnings?
thanks a lot!
I have similar case.
For Roth IRA excess contribution ($6500) made in Jan 17, 2017 (on March 31, 2017 turn to age 59), removed ineligible contribution with earnings in March 2021:
Q1: Do I pay 10% early-distribution penalty for each year plus 6% penalty for over 5 years?
Q2: Do I need to amend tax return1040 for 2017, 2018,2019, 2020, 2021 to pay taxes on earnings?
Thanks for your advice!
2004taxfile1, this excess contribution is subject to 6% excess-contribution penalties on 2017, 2018, 2019 and 2020 Forms 5329. If the contribution was for 2016, it is also subject to a 6% excess-contribution penalty on a 2016 Form 5329. With no distributions in those years, there is no early-distribution penalty to be reported on those Forms 5329. The distribution in March 2021 will appear on your 2021 Form 5329 Part IV, reducing the excess for 2021 to zero.
There is no tax or early early-distribution penalty on the distribution of $6,500 because that is a distribution of contribution basis, even though that basis derived from an excess contribution. The unnecessary removal of an amount equal to the earnings attributable to that excess contribution will be taxable if you made no other Roth IRA contributions, but the distribution will not be subject to any early distribution penalty because you reached age 59½ in 2017.
Did you make any prior Roth IRA contributions that were not excess contributions?
Thank you so much for your great info - I don't need to pay 10% early withdraw penalty!
My answer to your questions:
1. Roth IRA excess contribution ($6500) made in Jan 17, 2017 was for Calendar Year 2017
2. Did you make any prior Roth IRA contributions that were not excess contributions? [ Yes, I did]
-----------------------------------
Additional Questions:
1. Can I create substitute 2017, 2018, 2019 and 2020 1099-R (pay 6% excess-contribution penalties) with my current 2020 tax return in Turbotax (The formal1099-R will be available from brokerage firm in 2022).
2. when do I need to amend 1040-X for 2017, 2018, 2019 and 2020 to pay taxes on earnings?
Thank you so, so much!
There is nothing to report on a substitute Forms 1099-R, so no reason to create any. The distribution that you received in 2021 is the only distribution that you received and, as I mentioned earlier, the 2021 code J Form 1099-R that you will receive near the end of January 2022 will be reportable on your 2021 tax return to eliminate the excess.
Since your first contribution was made for some year prior to 2017 and you reached age 59½ in 2017the amount you took out beyond the $6,500 is a qualified distribution, tax and penalty free. Nothing you took out of your Roth IRA in 2021 or any additional amounts you take out in 2021 and beyond is subject to any income tax or early-distribution penalty.
The sooner you file the Forms 5329 to report and pay the penalties on the excess contribution, the less that the IRS is likely to bill you for interest on these amounts that should have been reported and paid years ago.
You provided quick, clear and simple solution for complex issues.
Only thing left for me to to is to file the Forms 5329 to report and pay the penalties on the excess contribution asap once brakeage firm finishes removing excess contribution process. I can pay IRA online.
Remaining question:
Do I need to fill out 4 forms 5329 for each different year or
just fill out one form 5329 for 2017, 2018,2019,2020 together?
Thank you for your patients and kindness!
You're truly great expert!
Four different Forms 1099-R, one for each year. Excess Roth IRA contributions are reported on Part IV.
https://www.irs.gov/pub/irs-prior/f5329--2017.pdf
https://www.irs.gov/pub/irs-prior/f5329--2018.pdf