How do I report on excess Roth IRA contribution made in 2020?

Don’t withdraw the excess. The deadline to cure the excess contribution by withdrawing it was May 17, 2021 (the regular tax deadline) or October 15, 2021 (if you had a deadline extension). Both of those dates are passed.

You must file an amended 2020 return that calculates and reports the excess contribution and that you did not withdraw it in time. You will be assessed a 6% penalty on the amount of excess contribution.

You will be assessed a further 6% penalty on the excess amount every year that the excess remains on corrected. The only way to correct the excess after the tax filing deadline is by applying the excess toward a future year’s contribution.  For example, suppose that due to your income, your contribution limit for 2021 is $4000, and the excess from 2020 was $1000.  If you only contributed $3000 in 2021, you could count the $1000 excess from 2020 as part of your 2021 contribution limit. That would clear the excess and you would not be assessed a future penalty.

While the excess CAN be applied to a 2021 contribution without having it distributed to you, you can also just take a normal distribution of the excess that will not be taxable.

Thank you for the information. I actually should have not contributed anything in 2020. My income exceeded the max limit for Roth IRA in 2021 as well. In this case, what would you recommend? Should I (can I?) move the excess from 2020 to 2021 and then do the withdrawal from 2021 contribution? TIA!

@hhtax5 

First, check your 2020 tax return. If you did not report the excess contribution and did not include form 5329 to calculate the additional 6% penalty, then you need to file an amended 2020 tax return to report the excess contribution and pay the tax.

Then, you need to withdraw the excess 2020 contribution before December 31, 2021.  (Remember that you can withdraw contributions from a Roth IRA at any time without paying tax.  You will pay income tax and a penalty if you withdraw the earnings before age 59 1/2.)

When preparing your 2021 tax return, TurboTax will ask you for the excess Roth contribution from 2020, which is reported on your amended 2020 tax return form 5329. TurboTax will ask if you made any new Roth contributions or took any Roth withdrawals.  When you report that you made a withdrawal equal to the 2020 excess, that will be reported on your 2021 form 5329 and it will zero out the excess so there will be no further 6% penalty.

Thank you very much for your detail response! Does the following actions make sense? 
1. file amended 2020 return on the excess amount

2. Withdraw excess contribution from 2020 by 12/31/2021 (leave earnings in account)

3. Report withdrawal when filing 2021 return

Last question, does it mean I will be paying 6% tax for 2020 and then 2021 again? 

thanks!!

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@hhtax5 wrote:

Thank you very much for your detail response! Does the following actions make sense? 
1. file amended 2020 return on the excess amount

2. Withdraw excess contribution from 2020 by 12/31/2021 (leave earnings in account)

3. Report withdrawal when filing 2021 return

 

Last question, does it mean I will be paying 6% tax for 2020 and then 2021 again? 

thanks!!

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Your plan is correct.  You will pay 6% on the excess on your 2020 return but you won't pay an additional penalty in 2021 if you withdraw the excess before 12/31/21.

I read some articles if we do not take action to withdraw excess after 10/15 in the following year,  when we remove the excess later, the excess will be considered the income and we are due for double taxation.  I did not see this portion being mentioned.  Could you please help clarify that ?

From IRS : Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan.

What you read appears to be an inaccurate mishmash of the consequence for making an excess contribution to a designated Roth account which is not timely corrected with information about correcting excess contributions to a Roth IRA, two different types of Roth accounts.

An excess contribution to a designated Roth account in an employer plan like a 401(k) must be corrected by a return of excess contribution by April 1 of the following year, otherwise the excess contribution and its attributable net income are subject to taxation upon distribution, making for double taxation of the amount of the excess contribution.  Distributions from the designated Roth account after the April 1 deadline, no matter  ho long after the distribution occurs, consist first of that excess contribution and attributable net earnings until the excess is fully resolved.

Excess contributions to Roth IRAs are treated differently.  You have until the due date of your tax return for the year for which you made the contribution, including extensions, to obtain a return of the excess contribution to avoid the 6% excess contribution penalty you would otherwise incur.  Distributions after that deadline correct the excess but are only taxable to the extent of the attributable net income required to be distributed; the amount of the excess contribution itself is not taxed again.  Another difference between and excess contribution to a Roth IRA and a designated Roth account in an employer plan is that the excess Roth IRA contribution is subject to the 6% excess contribution penalty each year that the excess remains in the account.  You also have the option to apply the excess contribution in the Roth IRA as some or all of a subsequent year's Roth IRA contribution.  That option is not available in a designated Roth account.

Elective deferrals are employee contributions to the traditional account in an employer plan like a 401(k) and are subject to the same rules and double taxation as with excess contributions to the plan's designated Roth account because they are not excludible from income in the year the contribution was made.

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@camel207 wrote:

I read some articles if we do not take action to withdraw excess after 10/15 in the following year,  when we remove the excess later, the excess will be considered the income and we are due for double taxation.  I did not see this portion being mentioned.  Could you please help clarify that ?

 

From IRS : Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan.

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IRAs and qualified workplace plans (like 401(k)s) are covered by different sections of the tax code and some rules and regulations are very different, even though the accounts have the same basic purpose.  A Roth IRA is not the same as a designated Roth option with a workplace plan.  

Make sure you understand what kind of account you are dealing with before you go looking for online information.

The question you are responding to was about a Roth IRA.  Your comments are more closely applicable to a Roth option workplace plan. 

Thank you so much for your reply.

I copied and pasted both articles for your reference.  I believe both of them are talking about IRA only (not 401k)

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf

Two sections talks about withdraw excess with double taxation

Page 2:    3. Removed excess after the tax filling deadline 

Last page :  Removal of excess after due date hypothetical

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

One section talks about withdraw excess with double taxation

Withdraw the excess the following year

Could you please take a look and help me understand which way is correct. 

The Wells Fargo reference is talking about an excess traditional IRA contribution and is wrong.  As long as the amount contributed for the year to a traditional IRA was no more that the statutory limit for the year (for 2022, $6,000 if under age 50, $7,000 if over age 50), the distribution of the excess after the extended due date of the tax return is not taxable, so no double taxation.  Because the excess is not taxable upon distribution, there is also no early-distribution penalty.  See section 408(d)(5) of the tax code which indicates that paragraph (1) [inclusion in taxable income] does not apply:

https://www.law.cornell.edu/uscode/text/26/408#d

TurboTax has a way to indicate such a distribution of an excess after the due date.  It's done by entering a zero in box 2a of TurboTax's 1099-R form instead of entering the actual amount from box 2a of the Form 1099-R provided by the traditional IRA custodian.  TurboTax will then prompt for an explanation statement where you'll explain that the distribution is a nontaxable distribution of the excess after the due date of the tax return for the year for which the contribution was made.

The Motley Fool reference refers to a distribution of the excess from a Roth IRA after the due date of the tax return, but makes a different mistake.  Even though it's an excess contribution, the excess contribution adds to Roth IRA contribution basis.  Because contribution basis comes out first, the distribution of the excess after the due date consists entirely of nontaxable contribution basis.  Again, because it's nontaxable, there is also no early-distribution penalty.  TurboTax also handles this distribution correctly by determining on Form 8606 Part III that the distribution is nontaxable and also including it on Form 5329 to reduce the amount of excess in the Roth IRA on which an excess contribution penalty is calculated.

In both the case of an excess traditional IRA contribution and an excess Roth IRA contribution, the nontaxable treatment I've described is consistent with being able to apply the excess as some or all a year's contribution.  Applying it as a contribution for some year after the year for which the excess contribution is made is equivalent to taking it out as a nontaxable distribution and then putting it back as a new contribution.