Excess Roth beyond AGI limit & 6% penalty

[anntt]

Hello there Question regarding excess contribution into the Roth account

Few years ago I contributed $6000 in 2020 towards 2019 tax year Roth IRA even though my AGI was about the limit. My custodian even though I had an advisor did not advise me correctly or catch this mistake then. Fast FW its 2024 now.  In order to pay the 6% penalty, for 2019, wouldn’t my penalty be 0? Because the account balance year end statement of 2019, shows IRA balance = 0 as I deposited for the first time in 2020, towards 2019. I then deposited in 2020 $6000 again in Roth for tax year 2020 and my 2020 year end balance was $12000. In 2021, I deposited again $6000, & incurred some losses and year end balance for 2021 was $15000 instead. How much would be my penalty for all of the years? And I did not have any other IRA accounts nor did I have any balance in them. How can I enter this correctly in the tax forms  in Turbotax? Apppreciate help on this. 

[dmertz · Accepted solution]

" In order to pay the 6% penalty, for 2019, wouldn’t my penalty be 0? Because the account balance year end statement of 2019, shows IRA balance = 0 as I deposited for the first time in 2020, towards 2019."

No.  For the purpose of determining the penalty for 2019, the contribution made in 2020 for 2019  is required to be added to your 2019 year-end balance.

Assuming that you had no other excess contributions and had not reached age 50 by 2021, your penalty is $360 for each year 2019, 2020 and 2021 for a total of $1,080.  You need to file 2019, 2020 and 2021 Forms 5329 to report and pay this penalty for each of these years.

You didn't ask about 2022, so I assume that in 2022 you either received a regular distribution of $6,000 or were about to apply the excess $6,000 as your 2022 Roth IRA contribution, eliminating the excess for 2022 and beyond.

[anntt]

What happens if the account value is significantly lower than the total contributions and eligible roll over across all IRA. 
so let’s say the ineligible contributions were 30k and eligible Roth rollover was 10k , making the total contributions 40k and account value is 30k, as there are losses. 

[dmertz]

Correcting the excess for years prior to 2024 would require taking a distributions from the Roth IRA(s) totaling $30,000 or the entire balance the the Roth IRA(s) whichever is less.  I don't think that the IRS has ever provided guidance on whether the distribution of all Roth IRA funds would eliminate the excess if the balance available was less than $30,000 or if some excess would carry forward despite there being no funds in Roth IRAs.  There wouldn't be any penalty since the balance was zero, but would the effect of the remaining excess reappear if you later had more funds in a Roth IRA due to making a contribution, conversion or rollover.  I don't know.

[anntt]

So the ineligible deposits are as follows

2019 $6k, 2020 $6k, 2021 $6k, 2022 $6k, 2023 $6.5k, 2024 $7k

2024 Eligible rollover from Roth 401k to Roth IRA 9.8k

Account Balance year end 2024 38k

Removed excess of 2024 in Jan 2025 ( $5500 and unremovable loss of $1500 calculated by custodian). Balance after this removal is 34K

should I withdraw everything out, that way all of the ineligible contributions 30.5k and partial contributions of the eligible rollover 3.5k making the balance 0

this would be non taxable event as the Roth IRA is more that 5 year old and there are no earnings only losses ? Would there be any 6% penalty since balance will be 0. This post is for my cousin btw. 

[dmertz]

To correct the $30,500 of excess contributions made prior to 2024, you need to obtain a $30,500 distribution from the $34,000 balance.  All $30,500 would be from regular Roth IRA contribution basis.  That would leave $3,500 in the Roth IRA.  No need to remove that,  It appears that all of your contribution basis would then be gone an you would have left only some contribution basis acquired from the Roth 401(k) rollover to the Roth IRA.

I'm not sure why you would want to take out the remaining $3,500.