excess Roth IRA contributions

[gjgogol]

@DanaB27 what about my 2022 tax penalty for my 2021 contribution? How do I handle the 2021 excess contribution on my 2022 return?

[DanaB27]

Yes, you will have to pay the 6% penalty for the 2021 excess on your 2022 tax return:

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. TurboTax will create Form 5329 for the 6% penalty.

@gjgogol 

[gjgogol]

@DanaB27 In an earlier post you stated, "Please make sure that the 2021 excess is withdrawn as a regular distribution without any earnings.".  Please help me understand the difference of withdrawing funds with or without earnings.  If I withdraw funds without earnings, what happens to those earnings in subsequent years?

[DanaB27]

If you withdraw an excess contribution before the extended due date, then you will need to withdraw the excess contribution plus earnings and it will be treated as never contributed, therefore you can avoid the 6% penalty. Please see Withdrawal of excess contributions for details.

If you withdraw the excess contribution after the extended due date, then you will have to pay the 6% penalty but you can leave the earnings in the account and therefore will request a regular distribution in the amount of the excess contribution.

@gjgogol

[gjgogol]

@DanaB27  "If you withdraw the excess contribution after the extended due date, then you will have to pay the 6% penalty but you can leave the earnings in the account and therefore will request a regular distribution in the amount of the excess contribution."... Can I withdraw the earnings as well?  If I do I will end up paying taxes on the earnings I withdraw, correct?  I cannot imagine that my earnings since December 2021 will be that much. Is there an advantage of leaving earnings in the account other than avoiding being taxed? Tax will be assessed on my 2023 return since I would be withdrawing the earnings in 2023, correct?

[DanaB27]

Yes, you can withdraw the earnings this will not be taxable if you had the Roth IRA for 5 years since you are over 59 1/2. Please see Qualified Distributions for additional information.

If you had the Roth IRA for less than 5 years then this would be taxable if you remove earnings (remove more than the net contributions and conversions).

Yes, the distribution received in 2023 would be reported on your 2023 tax return.

An advantage of leaving the earnings in the account is that they can grow tax-free.

@gjgogol 

[gjgogol]

@DanaB27  So I have had a very small roth IRA that I opened up in 2003 but have not added any funding to it since. The excess contribution was made in 2021 to a different account with a different custodian.  Previously you mentioned that the IRS from their perspective essentially "consolidates" and treats all roth accounts as one. So would the 5 year holding rule apply in my case since I opened a roth account back in 2003 or does it apply to each contribution and the date the contribution was made? 

[DanaB27]

Yes, all Roth IRAs would be consolidated and you would have passed the 5-year requirement. Any distributions you take will be Qualified Distributions.

@gjgogol 

[gjgogol]

@DanaB27  Earlier you stated, "You don’t have to pay the 6% penalty on your 2022 tax return for the 2022 excess since you are removing the excess and earnings before the due date (or recharacterizing it). But you will have to pay the 6% penalty for the 2021 excess on your 2022 tax return since it was not removed by December 31, 2022."  So to be clear, even though I withdrew the 2022 excess contribution on 31 March 2023, but BEFORE I submitted my 2022 tax return, I will still be assessed the 6% penalty on my 2022 return for the 2021 excess contribution?

TT questions:

1 - I did the amended 2021 return and it created a Sched 2 and Form 5329,  but it looks like it has me also resubmitting Sched 3, B, D and Form 8995. Is that sound correct...even though those other forms didn't change?

2 - Is TT supposed to be allowing me to submit amended form electronically, because it is not.

3 - TT is also requiring me to submit an amended state return for 2021 even though nothing has changed on that form, does that sound correct?

[gjgogol]

@DanaB27  I had previously created a 2022 tax return BEFORE I learned about my mistake. Now that I completed the amended return for 2021, do I need to delete what I originally did for 2022 and recreate/start all over for 2022 using the 2021 amendment as the form to bring over to my 2022 tax return? Or do I start a new 2022 tax return using my initial/original 2021 tax return submission?

[DanaB27]

Yes, since the 2021 excess contribution wasn’t removed until March 2023 you will have to pay the 6% penalty on your 2022 tax return. Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA.

1. No, if they didn’t change then you don’t have to include them when you mail the amended return.
2. Some users have had issues e-filing prior year amended returns and had to mail it.
3. No, if your state return didn’t change then you do not need to file an amended state return.

You can use the 2022 tax return that you started you only need to enter the 2021 excess contribution on your 2022 tax return:

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.

@gjgogol

[gjgogol]

@DanaB27 Thank you again for your advice AND patience. It seems so counterintuitive that they allow you up to take 15 1/2 months to contribute to an IRA yet they do not allow you the same amount of time to withdraw it even though it is the second year of the infraction.  One would think that they would also allow you to take up to15 1/2 months to fix the second year of the 2021 infraction, i.e. April 18 2023 (before 2022 submission) for a 2021 contribution. After all, the IRS gave me until April 15, 2022 to fix the 2021 excess contribution. So frustrating.  Is there a direct cite in any IRS Publication that specifically addresses the second year of an initial excess contribution infraction?

[DanaB27]

Pub 590-A states: “For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.” 

Pub 590-A also states: "In general, if the excess contributions for a year aren’t withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of your tax year." (this same rule applies to Roth IRA)

Therefore, you only have until the extended due date of the 2021 tax return to remove the 2021 excess (plus earnings) to avoid the 6% penalty. If you miss the deadline, then you will pay the 6% penalty for each year the excess stay in the account. Your 2021 excess stayed in the account in 2021 and 2022 and therefore you will need to pay the 6% penalty for each year.

@gjgogol 

[gjgogol]

@DanaB27  I followed your instructions, 

"You can use the 2022 tax return that you started you only need to enter the 2021 excess contribution on your 2022 tax return:

Click on "Search" on the top right and type “IRA contributions”

Click on “Jump to IRA contributions"

Select “Roth IRA”

On the "Do you have any Excess Roth Contributions" answer "Yes"

On the "Enter Excess Contributions" screen enter the total excess contribution from 2021."

When I inserted "IRA contributions" TT only returned questions w/responses. It did not offer me anything that stated "Jump to IRA contributions". Is there another way of getting to where I need to get to to input my 2021 excess contrituin?

[DanaB27]

Please try these steps:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “Roth IRA”
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.

@gjgogol