Excess IRA contribution discovered when amending 2019 return

[Topangamama]

In amending our 2019 return, I found that my husband (age 57) made an excess contribution of $3164 to his traditional IRA.  Turbotax suggests in order to avoid paying a penalty, to withdraw the excess contribution from his IRA before the filing deadline, which was last year.  He hasn't contributed anything to his IRA in 2020 - is it possible to apply the excess contribution to 2020, or do we need to withdraw the excess + money earned on it asap?  Is there a simple way to resolve this?  

Thanks in advance for any help/advice!

[fanfare]

using the amount you could be contributing for 2020 to "work off" your excess is the easiest solution !

He  must have earned income of at least $3164  to resolve it completely.

See Form 5329 Part III .

[Topangamama]

He didn't have any earned income in 2020, but I did.  As a married couple does my earned income count or does he specifically have to have earned income?  Thx

[fanfare]

Refer to the spousal IRA law which allows your income to be used for his contributions as long as his income is lower than yours.

[dmertz]

Yes, he can make a spousal IRA contribution based on your compensation as long as you file a joint tax return.

Regarding fanfare's most recent reply, his compensation, not his income, must be less than yours, which you have stated is the case here.

[Topangamama]

Thanks to both you and fanfare.  Unfortunately, my earned income was only $2970 in 2020 (Covid) and apparently unemployment compensation doesn't count.  To complicate matters, I've already contributed $6500 in 2020 towards my IRA, which I'll need to rectify.  What is the best way to handle this?  Do I make a corrective distribution before I file for 2020 and have my husband withdraw $2970 (plus earnings since deposited in 2019) from his IRA?  Or should he withdraw the entire amount ($3164 + earnings)?  How do I resolve this on the tax returns (currently amending the 2019 return and haven't yet prepared the 2020)?

Please help, I'm starting to freak out about this.

[dmertz]

A return of contribution must be obtained for any amount of combined IRA contributions for 2020 between you and your husband in excess of your $2,970 of compensation.

I'm unclear as to how much you have contributed for 2020 and how much your husband has contributed for 2020.  For what ever amount of contribution are requested to be returned, the custodian will calculate the attributable earnings and distribute those as well as the contribution that is being returned.  How you split the $2,970 between supporting your IRA contribution and supporting your husband's contribution is up to you.  If both of you have separately contributed more than $2,970, both of you will have to obtain a return of contribution of some amount to bring the total contributions down to $2,970.

[Topangamama]

Thank you.  My husband had no contributions in 2020 and I contributed $6500 in the Spring (at a low point in the market).  My understanding is that we can carry forward the excess contribution - the custodian of my IRA suggest I do so, since it has performed extremely well and would be subject to a 10% penalty if withdrawn.  This is assuming I would have enough earned income to carry it forward, so I suppose I will file for an extension in April if unsure.  Any thoughts on this?  I really appreciate the input.

[dmertz]

Yes, you would pay the 6% excess contribution penalty for 2019 and he can apply the excess as part of his 2020 contribution.  It appears that the deadline for doing anything to avoid the 6% penalty on the amended 2019 tax return has passed.

[fanfare]

You originally asked,

"is it possible to apply the excess contribution to 2020,"

subtract the excess from what you could contribute in 2020 and reserve for this purpose..

If you already used up that amount as a contribution for 2020,

you could try again next year, you will pay the 6% two times.

If your growth is way up it could be worth it. already you must pay 6% at least once.

there is no 10% penalty to take out excess contribution.

@dmertz the computed earnings is not considered an early withdrawal under age 59 1/2, right ?

[fanfare]

also important.

after a year has passed,

the earnings on your excess will remain in your Roth IRA when you remove the excess.

I'm thinking of putting $6,000 into two Roths, 

merging them and trading Tesla.

Let it rip. I have no compensation.

[dmertz]

Any gains that accompany a return of contribution from an IRA are subject to income tax and, if the distribution i made before reaching age 59½, to an early-distribution penalty.  The retuned contribution itself is not subject to any penalty.