How to answer "Do you have any excess roth contributions"

[tomandjerry1]

I'm a bit confused as to how to answer this question because of this additional bit TT has added "Tell us if you contributed more to a Roth IRA than was allowed in 2023 or any previous year".   I did indeed make an inadvertent excess Roth contribution for the tax year 2021 which I then detected in 2022 before filling my 2021 tax return.  In 2022 I requested my IRA trustee to remove the excess contribution and then handled the 1099-R form that I received for 2022 when filling my taxes for 2022.   Since this error was corrected should I still answer "Yes" here?   When I did try saying "Yes" then the subsequent questions and information on TTax screens didn't seem to make much sense?   If I say "yes" then the next screen asks "Your Excess Roth Contributions for Prior Years"  and then "Remember that excess contributions should be withdrawn to avoid additional tax" ??   Hello?  "Should be"?  I already have?  Then if I put in the amount of the excess for 2021 (that I'd already withdrawn in 2022, and handled when filing my 2022 taxes) ,  the next TTax screen was "Tell us the value of your Roth IRAs on Dec 31, 2023", and the amount that TTax has pre-filled in this field only shows the $7K ROTH contribution I made this year, and not the total value.   At this point I entered the  actual balance of my ROTH IRAs on Dec 31, 2023 and TTax leads me to a screen that says I don't  qualify for an IRA deduction.  Hello?  Roth contributions have never been deductible?   What is that actual point in this meaningless TTax digression?  Anyone?

[DanaB27]

You will answer "No" when TurboTax asks if you had excess contributions in prior years since you removed the 2021 excess contribution plus earnings before the due date. If you entered an excess contribution on the "Enter Excess Contributions" screen then please go back and delete the entry.

[tomandjerry1]

Thanks.  I'll follow your recommendation.  I think TTax could have been a bit clearer here.   Sounds like they're assuming that someone can make an excess contribution and then decide to just leave it there?  If you've made an excess contribution then isn't it the case that at some point you are going to receive an nasty-gram from the IRS since the IRS is aware of all contributions as a result of IRA trustees filing Form 5498.    Is it common, or reasonable, for someone to intentionally make an excess contribution to their IRA and just decide to let it ride?  If you've got just one then I assume your single IRA trustee wouldn't allow it.  The most likely case  is when you've got multiple IRAs with different trustees, or (in my case) moved your IRA from one brokerage to another so that the new IRA trustee was unaware of the prior contribution for the same tax year.   So, thanks again!  This community bulletin board service Intuit hosts is so GREAT! !

[fanfare]

Yes you can let it ride, either knowingly or unknowingly,

It is 6% per year penalty, eventually.

in the year you resolve the accumulated excess you have to enter the accumulated excess.

The consensus on the forum lately is that IRS does not crosscheck this information, due to cost constraints.

Congress, if Republican, wants to cancel the $80 Billion for IRS improvements.

@tomandjerry1 

[fanfare]

Say you put a disallowed $6,000 in your Roth IRA and bought an option with 10x leverage and it pays off.

You now have $60,000 in your Roth but after the tax return due date, you only have to remove $6,000.

The rest stays in the Roth IRA.

If it doesn't pay off you lose $6,000, or possibly less if you started with an empty Roth IRA.

@tomandjerry1 

[tomandjerry1]

Kudos DanaB27 and fanfare, and Intuit/TTax as well for hosting this community forum. Wonder if ChatGPT or other AI-bots are as yet as knowledgeable on the tax code. As for fanfare's final post about  gaming the IRA machinery to juice up one's Roth IRA balance by making an excess contribution, use this new balance to strategically invest in a way that produces a windfall, then removing the original excess amount, paying tax on the windfall gain, and ending up with the gain left in the Roth IRA to grow tax free! Have I understood this correctly?  Lastly, regarding IRS crosschecks, it's always been my understanding that things the IRS can easily check using automation (like numbers from W-2s. 1099s, and Form 5498s) will always get caught.  In past returns where I overlooked one of my 1099's it's my recollection that the IRS eventually detects this and notified me in a CP2000 letter.  Thanks again you all!

[fanfare]

"paying tax on the windfall gain,"

since a Roth IRA is tax-free, there is no tax on gains in a Roth IRA.

@tomandjerry1