Excess Roth IRA contributions in tax years 2021-2023

[DIYTaxRtn]

I discovered that I made excess Roth IRA contributions over the past 3 tax years (without receiving any notification for such):

2021: $4,020 excess

2022: $7,000 excess

2023: $7,500 excess

I understand that the 2023 contribution can be withdrawn without penalty, and the earnings taxed on NIA, net income attributable (gains in 2023 based on the over-contributed amount as a % of the account).  The first two years' contributions are penalized at 6% of the excess per year.  No distributions have been made from the account so far.

If I withdraw the total excess contributions, $18,520, plus the NIA earnings (?), prior to filing this year, what would be the best process in TurboTax to do this?  Also,

• Are the "excess" earnings in 2021-2022 also taxable, or does the 6% penalty cover that? 
• Should the earnings for any of the 3 years be withdrawn?

I've read that the IRA custodian can issue a 1099-R for the distributions.  Any insight on this would be much appreciated... Thanks.

[Opus 17]

You can't "withdraw the excess" 2021 and 2022 contributions, it's too late for that.  Anything you withdraw will happen in 2024 since it is now 2024.

In order,

1. File an amended 2021 return to report the excess and pay the 6% penalty on $4020 of contributions.

2. File an amended 2022 return to report the cumulative excess and pay the cumulative 6% penalty on $11,020. (A running tally is kept on form 5329.)

3. Contact the IRA custodian to perform a "removal of excess contribution" for 2023. You must do this before the filing deadline of April 15, 2024.  You only withdraw $7,500, which is the excess for 2023.  You can't use this procedure to remove the $11,020 from the past.  You must also withdraw the earnings attributable to the 2023 excess contributions.  This will be reported on a 1099-R form for tax year 2024, that you will get in January 2025.  The earnings will be taxed as regular income on your 2024 tax return plus a 10% penalty for early withdrawal if you are under age 59-1/2. [Edited correction, see below.] Even though the earnings will be reported on a 1099-R issued in January 2025 for tax year 2024, they are actually taxable for tax year 2023 (the year you made the excess contributions).  Create a "substitute 1099-R" in Turbotax to report the earnings.  You will pay income tax plus a 10% penalty unless you are over age 59-1/2.  When you get the 1099-R in 2025, you should report it on your 2024 tax return, but it will have a code so it won't be taxed.

4. File your 2023 tax return.  Ignore the 2023 Roth contributions since, if you remove them by the deadline, it will be as if they were never made.  However, you will still owe a 6% penalty on the combined excess contributions from 2021 and 2022 ($11,020).

5. Sometime before the end of 2024, make a regular withdrawal of $11,020. Since this is a withdrawal of contributions, it won't be taxed, although it will be reported on a 1099-R that you will include with your 2024 tax return.  There is no need to remove the earnings attributable to the $11,020 of excess contributions (that's what the 6% penalty was for).

6. On your 2024 tax return, you will report that you withdrew the excess contributions, which will zero out the excess contribution tally on form 5329.   You will get a 1099-R that shows the withdrawal of contributions (the $11,020) and earnings (the earnings attributable to the 2023 excess). You won't owe additional tax in 2024 because the earnings were already taxed and withdrawal of contributions is not taxable, but it needs to be reported. 

[DIYTaxRtn]

Thanks very much for your help, Opus 17!  It's very clear and concise, versus everything else I have found online on this type of scenario so far.  So if I understand correctly in step #4, there is also a penalty in 2023 for the combined 2021-22 excess, same as the penalty in 2022... 

Is it correct that form 5329 will be used with all 3 filings then, and a 4th and final form 5329 with the 2024 filing?

Also, I noticed that the 2023 TT will not do an amended return for 2021, but only back to 2022.  I have the previous years' software installations though and will try those.

[fanfare]

see this thread where the almost identical situation is discussed in detail

Excess Roth IRA Contribution in 2021 and 2022

@DIYTaxRtn 

[fanfare]

In your case where you made a contribution for 2023, it is not yet past the filing date of your 2023 return, so the procedure is different.

you need to request "return of contribution with associated earnings"

You must have a) filed by tax day, or b) requested an extension of time to file by tax day.

OR

wait until after April 15 (Oct 15 if you request an extension) and the 2023 contribution

becomes like the 2021 and 2022 contribution.

That costs you another 6% for 2023 contribution.

In some situations it is desirable to have the earnings remain in the Roth IRA.

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return of excess contribution:

before tax due date including extension: positive earnings allocable to the excess are taxable on the Line 4b for the year of the contribution. negative earnings are ignored; in which case, for purposes of basis, consider the original requested amount as returned.

positive earnings removed are no longer penalized 10% if you are under age 59 1/2. (eliminated in 2023)

@DIYTaxRtn 

[Opus 17]

@DIYTaxRtn 

Yes, you will pay a penalty in 2023 based on 6% of $11,020 (since any removal you plan will now happen in 2024, the excess was still there as of 2023.  But the penalty won't include the additional $7500 for 2023 if you remove it in time.

Yes, the penalties will be calculated on form 5329 for each year, with another form 5329 in 2024 showing you removed the excess and owe no further penalties.

Each year's software can only amend that year's return.  so you need 2021 to amend 2021, and so on.   (TT online might be able to amend one year back, that's a fairly new addition to the web site.)

Also note:

I made a mistake regarding the attributable earnings for the 2023 removal of excess contribution.  Because the excess $7500 was contributed in 2023, the earnings are reported as income on your 2023 tax return, even though you won't receive the funds until 2024.  On your 2023 tax return, you need to create a "substitute 1099-R" form to report the earnings and pay the income tax plus 10% penalty for early withdrawal.  You will still get a 1099-R for 2024 that lists the earnings, but it should have a code P, meaning it was taxable in the prior year, so it won;t be added to taxable income for the current year. 

[Opus 17]

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@fanfare wrote:

In your case where you made a contribution for 2023, it is not yet past the filing date of your 2023 return, so the procedure is different.

you need to request "return of contribution with associated earnings"

---

That's what I said.  For 2023, the excess can be removed before April 15.  (Actually, there is a 6 month extension but you have to follow a special rule.  Easier to fix it before April 15 since we know about it in plenty of time.)

The 2021 excess can't be removed using that procedure and is penalized on an amended 2021 return.  The 2022 excess can't be removed using that procedure and is penalized on an amended 2022 return and the original 2023 return.  The 2021 and 2022 excess can be withdrawal (not "removed") in 2024 which will close out the situation. 

[DIYTaxRtn]

Thanks @fanfare, for the additional information.  I will get the excess 2023 contribution returned prior to 4/15, in addition to the earnings from that (I'll ask the custodian to calculate the earnings attributable to the excess contribution).  The 2023 NIA earnings goes on the 1040 line 4b as a taxable IRA distribution because the excess shouldn't have been in the Roth.  And as @Opus 17 noted, I will do a substitute 1099-R with my return this year as it appears that I won't get that from the custodian until JAN 2025.

[DIYTaxRtn]

Thanks again, @Opus 17 .  I found that using the 2021 TT desktop version I still have installed will do the 2021 amended 1040 return, form 5329, etc.  Likewise for the 2022 version as needed.  I believe 2023 TT will do the substitute form 1099-R also, for the return this year.  The 10% penalty should not apply in any case as I am just past the 59.5 y/o vintage.