Excess Roth Contribution from 2 Years Ago - Complicated Issue

Forum|Forum|5 years ago
March 17, 2021
6 replies
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I am working on a 2020 tax return where an excess Roth IRA contribution was made in 2018 and distributed to the taxpayer in 2020, and there was a loss on the investment. A 1099-R with code J (early distribution from Roth IRA, no known exception) was issued, but does not include a second code to explain that the distribution was due to an excess contribution. The second codes available are 8 (excess contributions plus earnings taxable in 2020) or P (same thing but taxable in 2019), but there is no code for two years back. I understand that if there were earnings on the distribution, they would be taxable in 2018 in the year of contribution, but the investment lost money, so there are no earnings. The amount of the excess contribution was reported on form 5329 for 2019, and carries over to 2020. Since the 1099-R reports a distribution that is less than the excess amount (due to the loss), Turbotax is calculating the 6% penalty on the remaining amount (equal to the loss). Example $1,000 excess contributed, $200 loss on investment, $800 distributed, form 5329 shows $200 remaining from the excess contribution. Instructions for form 5329 details instructions if the balance of the entire Roth was distributed, but that is not the case. How do I report that the excess contribution WAS fully distributed, and no penalty is due?

Best answer by dmertz

In your example, the mistake was requesting a distribution that was adjusted for investment loss. After the due date of the 2018 tax return, a 2018 excess contribution can only be eliminated by making a regular distribution (code J) of the entire amount of the excess or by applying that excess as an eligible contribution for a subsequent year.

In your example, only $800 of the $1,000 was distributed and TurboTax is correctly reporting that $200 of the 2018 excess still remains in the Roth IRAs (unless the balance in all Roth IRAs was zero at the end of 2020 which you would indicate to TurboTax by saying that no Roth IRAs were "open" at the end of 2020). Since 2020 has passed, that $200 will need to be distributed as a regular distribution in 2021 to eliminate the remaining excess on the 2021 Form 5329.

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dmertzAnswer

Level 15

In your example, the mistake was requesting a distribution that was adjusted for investment loss. After the due date of the 2018 tax return, a 2018 excess contribution can only be eliminated by making a regular distribution (code J) of the entire amount of the excess or by applying that excess as an eligible contribution for a subsequent year.

In your example, only $800 of the $1,000 was distributed and TurboTax is correctly reporting that $200 of the 2018 excess still remains in the Roth IRAs (unless the balance in all Roth IRAs was zero at the end of 2020 which you would indicate to TurboTax by saying that no Roth IRAs were "open" at the end of 2020). Since 2020 has passed, that $200 will need to be distributed as a regular distribution in 2021 to eliminate the remaining excess on the 2021 Form 5329.

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JanAnnDanAuthor

Level 2

Thank you - that makes sense as there are codes for excess contribution distributions for 2019 and 2020 but not for earlier tax years. The request to the IRA custodian was to distribute the excess contribution, but unfortunately, the custodian made the calculation and distributed the $800 amount, as opposed to our requesting a specific amount. Thanks for the response, and we will be requesting the balance tomorrow. Can you point me to where I can find this info and which instruction resource? This is the first issue where I have been unable to locate an answer, so I would like to know what I overlooked. I found info about how to handle if it was a final distribution from the Roth, which is different than our case. Thanks again.

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dmertz

Level 15

It's not really straightforward to find this. It derives from section 408(d)(5) of the tax code which was originally written for traditional IRAs. This means that you must look in IRS Pub 590-A in the section that describes a distribution after the due date of the tax return of excess contributions made to traditional IRAs. Also look at Part IV of Form 5329, in particular ho a regular distribution reported on line 20 reduces the excess.