Excess 2016 and 2017 Roth IRA contributions. How to fix?

[dmertz]

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.)

[kate3116]

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!

[macuser_22]

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@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.

[2004taxfile1]

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!

[2004taxfile1]

@dmertz 

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!

[dmertz]

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?

[2004taxfile1]

@dmertz 

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, not for 2016.

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!

[dmertz]

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.

[2004taxfile1]

@dmertz 

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!

[dmertz]

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

https://www.irs.gov/pub/irs-prior/f5329--2019.pdf

https://www.irs.gov/pub/irs-prior/f5329--2020.pdf

[2004taxfile1]

@dmertz 

Thank you very, very much for your detailed instructions, which is wonderful!

I only filled out Part IV on form 5329 for 2017 and 2018 as samples for you review. 

If they are correct, I will finish forms 5329 for 2019 and 2020.

Thanks a lot!

For year 2017

For year 2018

[dmertz]

That's what I would expect.  2019 and 2020 will look like 2018.

[2004taxfile1]

@dmertz 

Yes, I will fill out rest of forms like 2018.

You're so knowledgeable!

I am so grateful and lucky to have your great help!

Once again thank for your kind-hearted!

[2004taxfile1]

@dmertz 

I really trust your expertise and would like to ask your advice for this issue:

I mistakenly made excess Roth IRA contribution $7000 in 2020 for 2020 and removed $7677 with earnings in March 2021.  I was 62 last year and will receive 1099-R for it in Jan, 2022.

Is this a good idea to enter a substitute 1099-R with my 2020 tax return by April 15 (or May 15), 2021?

If so, would you be kind to help review - whether I did it right? I left many blanks and don't know what to enter/select.

Thank you for the great help!

[dmertz]

Because this distribution was from a Roth IRA, you must mark the box indicating that you have more than one value in box 7 and select code J for the second code.  The code J is necessary to indicate that it's from a Roth IRA.

If you were over age 59½ at the time of this distribution, you'll need to claim an Other reason exception on line 2 of your 2020 Form 5329 to the 10% early-distribution penalty on the $677.81, otherwise you owe a $68 penalty on 2020 Form 5329.

Entering it as a substitute Form 1099-R would only serve to prevent you from e-filing.  The form is not missing or erroneous since the deadline for the payer to generate the actual form is not until January 2022.