Excess Roth Contributions in Prior Tax Year - Handling

[jackstreet2]

Scenario:

Due to various credits and income limits, as well as a large spousal income spread, my spouse and I decided to file married filing separately for TY2020.  Just the way the math worked out, and we were tax advantaged to do so.

However,  while filing, we neglected and TT didn't flag our maxed out Roth contributions ($6k each) that were already contributed for the year.  So these funds have been in our Roth accounts since 2020.

Working the joint/seperate numbers this year, we now realize that were were ineligible due to filing status and income limits to contribute above $0 to Roths in 2020.

What is the best way to correct this?  It seems we need to 1) withdraw funds from accounts, and 2) account for 6% penalty (and maybe 10% unqualified withdrawal).  TT2020 has an option to report excess contributions for this year (2021) or any previous  year which generates form 5329.  Without entering the year in which these were contributed in excess, how is TT calculating it and how should I proceed.  Will I need to amend my 2020 taxes before filing 2021?  TIA!

[MarilynG1]

It is surprising that 2020 TurboTax didn't report your Excess Contribution.  You should Amend your 2020 return and go through that section again.  

You are correct that once the excess is known in 2020, there are several ways to handle it, including rolling it over to 2021.

However, If you report the excess in 2021 (for 2020), you will be charged the penalty for 2021 if you don't remove it before tax filing deadline. TurboTax would not know that you didn't pay it in 2020; it is only calculating for 2021. 

Click this link for detailed info on reporting Excess Contributions and how to handle them. 

[jackstreet2]

As an alternative, reviewing the numbers seems like for our situation, married filing jointly for 2020 would have been tax advantaged in the long term due to the excess roth penalties.

If I amend 2020 taxes and change filing status, would this close the loop on the excess without further action?

I would imagine it would be advised to file for extension for 2021 and let the dust settle on amended return before filing 2021.

[DanaB27]

Yes, you can change your filing status to married filing jointly.

Yes, it can solve your excess contribution issue if with that filing status your MAGI won't be over the Roth contribution limit. Then no other actions are needed.

You do not need to wait to file your 2021 return but if you wish to file an extension please see How do I file an IRS extension (Form 4868).

Please see What happens if I made an excess Roth IRA contribution for additional information. 

@jackstreet2