Excess Roth IRA contribution clarification needed

[vcwu]

Do I need to tell my Roth IRA custodian about the Carryover or they don't need to know?   It is between me and IRS.

I guess  carryover  does not generate any distribution or removal of gain from contribution   so basically no change to my Roth IRA account.    I will not get any 1099-R or any Form  ( Is there one for Carryover)  from the Roth IRA  Custodian.     

In  2022,  what I need to do is to  fill the Form 5329  by myself  to report the $7K excess contribution in 2020 and pay my  $420 excise tax.      I do want to keep    the money in Roth .    

Thank for clarify this. 

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Just wonder.   Alternatively ,  after the time allowed for  Eliminating excess contribution,  I can fix it by making Ordinary Distribution of $7K (or it needs to include the gain)    with no  tax consequence  (on earned interest).  As I just turn 60 year old, I don't pay  early withdrawal penalty or income tax on  distribution.    Since I rather leave more  in the Roth IRA for growth,    it would be better to pay the $420  excise tax once in order to keep the $7 contribution and its large gain of interest untouched din the Roth account.   

[dmertz]

Excess contributions are between you and the IRS.

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after the time allowed for  Eliminating excess contribution,  I can fix it by making Ordinary Distribution of $7K (or it needs to include the gain)    with no  tax consequence  (on earned interest).

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Yes, after October 15, 2021 but no later than December 31, 2021 you could make a regular distribution of $7,000 with no adjustment for earnings, eliminating the excess for 2021 and beyond.

[vcwu]

Thank you.    

On carryover/absorption (that my allowed  2021 Roth IRA  contribution limit will completely eliminate the excess  in 2020),     what is the best way to report with  Turbotax? 

Seems 2020  5329 can only report 2020 excessive contribution.     In 2021 tax return with  5329, I won't have the 2020 5329  excessive amount  to base on and  therefore , IRS requires me to amended 2020 tax return with the 2020 5329 to report the excess.

If I am okay paying the excise tax now, would it  be simpler  with TurboTax that :

1) I  report the  excessive contribution on 5329 in 2020  and pay the  excise tax.           

2) In  2021, I follow through with the 2021 5329   to report Zero excessive contribution (by absorption) 

3) I don't need to amend my 2020   tax return or its 5329.                                     

Is it allowed or doable? 

[dmertz]

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In 2021 tax return with  5329, I won't have the 2020 5329  excessive amount  to base on and  therefore , IRS requires me to amended 2020 tax return with the 2020 5329 to report the excess.

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You said that the excess contribution for 2020 that will remain unresolved before the due date of your 2020 tax return.  That's the amount that will be on line 24 of your 2020 Form 5329 when you file and the amount that will transfer to line 18 of your 2021 Form 5329.  The 2020 Form 5329 will result in the $420 penalty being part of your tax liability from which your 2020 refund or balance due will be determined.  There will be nothing to amend with regard to your 2020 tax return because you will already have reported the excess contribution and paid the additional $420 of tax.

[vcwu]

 Thank you. It is all clear.     For those  reading this  thread the 1st time,  the advises  were all clear and correct .

Let's clarify it more:

The discussion was originally  focus on people  wants to correct their excess contribution in the year   and/or to avoid paying the excise tax.  It also addressed people that do not aware of the "excess contribution" and retro reporting/fixing the issue with IRS.    File and pay the excise tax ASAP   is sort of at the bottom of consideration.

My case turns  be to be extreme opposite.     I know about the excess contribution (honor mistake)  and decide paying the excise tax is the best financial option for  me    AND is able  to use    absorption /carry-over to eliminate the all excess contribution the following year.     As a result, the correct tax filing process  for me is do report the excess contribution and pay the excise tax on my  tax return now  (with 5329)    and the following year tax return will pick up the rest with another 5329.     So it is straight forward,  simple, easy  and  not to worry about any Net income  & tax consequence,...etc.       

Without  tax professional  to review my case in details, the most work  for me is to study the various correction options & schedule,  tax filing options   and to determine what is best  financial case and tax reporting for my case.  

Thank you for all advises and DMERTZ.  The thread is now close ( for me). 

[2019victor]

Hi @dmertz 

Could you please advise how to "recharacterize the excess Roth IRA contribution to be a traditional IRA contribution"? What forms will be generated together with this recharacterizing?

My story: excess contribution for Roth in 2020, and will remove in March-2021.

Right now I'm at the step: Turbotax tell me I have exceed contribution, and ask if I remove to prevent penalty. 

What should I do next? Come back and input the contribution after subtract recharacterizing amount?

Thank you.

[dmertz]

@2019victor , see macuser_22's reply to your question.

[macuser_22]

@dmertz I think @2019victor asked how to recharactorize it.

Ask the IRA custodian to recharactorize the Roth excess plus earning to a Traditional IRA so yiu can report it as a deductible contribution (if you qualify) or a non-deductible contribution if you do  not qualify  for (or want) a deduction.

You will receive a 2021 1099-R with a code R in box 7 that can be ignored if already reported and you know the amounts and earnings.

The proper way to report the recharacterization and earnings which is to enter the 2019 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2019 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

[dmertz]

Thanks @macuser_22 , with so many people adding on to this thread I lost track.

[2019victor]

Thank you so much @macuser_22 , @dmertz 

I have 1 more question:

In Jan 2021 I contribute 6k to Roth IRA and immediately recognize my income in 2021 may exceed the limit so after that 1 week, I withdrawn 6k back to checking account already.

("may": mean I don't know what my income will be, so for safety I removed it, so no earning is generated)

Can I now contribute 6k to Traditional IRA and convert it to Roth IRA (as back door)?

(This IRA traditional account can contain the money I recharacterize from Roth 2020 right? I read somewhere they recommend empty traditional IRA in order to make back door Roth)

If so, what forms and how can I input to turbo tax for 2 actions above (for file tax return in 2021)? Thank you so much. 

Have a good day.

[macuser_22]

Yes you can do that.   Any earnings will be a small amount of taxable income and be part of the conversion.

A backdoor Roth only works it the entire Traditional IRA is converted so the year end value is zero.

[ecwapa]

Following the instructions here, removed the excess contributions ($6k) for both me and spouse for 2020 and shows line 25 with $6K withdrawn before due date, but at the error check it says my Roth IRA contribution credit should be equal to $340. Where does this come from and what do I with this?

[ecwapa]

Figured it out, had issues with mixed numbers in 5329 form.

[kng88]

Thank you @macuser_22 for your reply! This is exactly what I was looking for.

May I ask you a follow-up question regarding to the earnings attributable to the excess contribution? Will the earnings still be subject to the 10% early withdrawal penalty even though I am recharacterizing the earnings to a traditional IRA account?

Thank you so much!

[macuser_22]

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@kng88 wrote:

Thank you @macuser_22 for your reply! This is exactly what I was looking for.

May I ask you a follow-up question regarding to the earnings attributable to the excess contribution? Will the earnings still be subject to the 10% early withdrawal penalty even though I am recharacterizing the earnings to a traditional IRA account?

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No.  The earnings are simply moved to the other account.