Fixing Roth IRA Excess Contribution for Tax Year 2022 (Made in 2023 as Prior Year Contribution)

[stelle413]

I mistakenly made an excess contribution of $6,000 to my Roth IRA for 2022 when I didn't have earned income.  I made the contribution in 2023 as a prior year contribution for 2022.

I know I already missed the deadline for correcting the mistake.  It's my understanding that I can carry forward the excess contribution to 2023 and 2024 (I am eligible to contribute $1,000 to my Roth IRA in 2023, and $6,500 in 2024). 

Please help me figure out what forms I need to file and what penalty I owe.

Will I owe a penalty of 6% of $6,000 for only one year?

Do I need to file an amended 1040-x and Form 5329 for 2022 with a check for $360, and a Form 5329 with my 2023 tax return?

Thank you!

[DanaB27]

Yes, you will have the 6% penalty on your 2022 return, calculated on Form 5329 part IV. If you didn't have the penalty on your 2022 return then you will need to amend the return and add the Roth IRA contribution in the IRA contribution section. Please see How do I amend my federal tax return for a prior year?

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter the Roth IRA contribution for 2022.

No, you will not pay the penalty for only one year. You will also pay the 6% penalty on the excess amount that cannot be applied to 2023. This is calculated on Form 5329 part IV on your 2023 return.

On your 2023 return follow these steps to apply part of the excess contribution to 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 2022.
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023.

On your 2024 return you will repeat the steps and your excess contribution should resolve.

[stelle413]

Thank you for your reply!  Could you please clarify if I will pay a 6% penalty for one or two years? I'm sorry, I can't tell which of my questions your "yes" and "no" answers are replying to.

[DanaB27]

You will pay the 6% penalty in 2022 and 2023.

[stelle413]

Thank you so much for the clarification.  Is there any way I can avoid paying two years worth of penalties since I didn't make the contribution until April 18, 2023?  That was less than a year ago.

[DanaB27]

No, you had until October 16, 2023 (extended due date) to remove the excess contribution plus earnings for 2022. If you did not do that then you will have to pay the 6% penalty on your 2022 return.

[stelle413]

Thank you again.  Is there a way to avoid paying a 6% penalty on my 2023 return too?

[DanaB27]

No, since the 2022 excess contribution wasn't removed by December 31, 2023, and you cannot apply the full amount as a contribution for 2023, you will have to pay the 6% penalty on the excess contribution on your 2023 tax return. 

[stelle413]

Thank you again. This is very helpful.  Hopefully these are my last questions:

1) Is it fine to submit my amended 2022 return in the mail at the same time as I e-file my 2023 return?

2) Do I need to submit a payment to the IRS for the penalties for 2022 and 2023 if I expect my refund for 2023 to be more than the combined penalties for 2022 and 2023?

[DanaB27]

1) Yes.

2) You will pay the amount due as shown on he amended 2022 return. Please see IRS Make a Payment for payment options. 

The penalty for 2023 will be include on your 2023 tax return and if you have a refund on line 34 of Form 1040 then you do not need to make any payments for 2023.