Excess Roth contribution in 2021, how can I apply it to 2023?

[Stephen_]

I have an excess contribution of $1500 for 2021 tax year, paid 6% penalty for that year but failed to take any corrective action so far. Now I am preparing my 2022 taxes and am getting frustrated with all the technicalities of how to withdraw the excess in order to avoid paying a penalty for 2022.
Because of the relative low penalty ($89), I would rather pay that amount again for 2022 and
choose to apply the excess to tax year 2023, since this 'seems' easy enough.
(I already maxed out the $7000 (>50 y.o.) Roth contribution for 2022 by mistake, so I imagine I cannot apply excess to 2022 then).

My assumption is all I need to do in order to make the penalty go away is make sure I keep the contribution for tax year 2023 at least $1500 below the max allowed for the year and Turbotax will automatically consider the excess from 2021 unwinded when I do my 2023 taxes next year. Further, I assume there is no need to calculate/report/withdraw any prorated earnings for the excess contribution made in 2021.

Q1: Are the assumptions above correct? If not, how does one choose to "apply excess to next year", in my situation?
Q2: Would you recommend an easier solution? (If I withdraw $1500 I will be penalized 10% since I am not 59 1/2 yet)

Thank you

[DanaB27 · Accepted solution]

Q1 Yes.

Next year on your 2023 tax return to absorb the excess in 2023:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023.

Q2. You could just take a regular distribution in the amount of $1,500 (without earnings) since it is after the extended due date of the 2021 tax return. You would still have to pay the 6% for the 2022 tax return but the distribution would remove the excess from your 2023 tax return. But since this is a return of contribution (no earnings) it would not be taxable income and not subject to the 10% early withdrawal penalty.

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2023 (include the excess contribution for 2021 here) on the "Enter Prior Year Roth IRA Contributions" screen
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021.

Overall it seems option 1 would be easier as long as you are sure that you will be able to make Roth IRA contributions and are not limited by the MAGI. Please see Amount of Roth IRA Contributions That You Can Make For 2023 for additional information.

[Stephen_]

@DanaB27, thank you much for a detailed, clear and above all timely answer, just when I needed it!
Turbotax community is great.

After learning now that a withdrawal of the Roth excess will not be subject to the 10% age penalty I am thinking to take your suggestion under Q2 and withdraw the excess in 2022.
Can I only do this starting on Oct 17?  

[Stephen_]

..I meant to write "I am thinking to take your suggestion under Q2 and withdraw the excess in 2023"
(not 2022).

[DanaB27 · Accepted solution]

No, since this was an excess contribution for 2021 you can withdraw it anytime in 2023 as a regular distribution. Just make sure you take it out by December 31, 2023, to avoid the 6% penalty for 2023.

@Stephen_