How to fix excess contribution to Roth IRA?

[vijay-saikrishna]

Hi,

In my Roth IRA, I made some excess contributions.

2016, 2017 - Within the limits.

2018 - Excess of $750

2019 - Didn't contributed at all.

2020 - Excess of $2500

I realized the mistake when filing 2020 taxes (in 2021). Now I have to fix both 2018 and 2020.

Fixing 2020 is fairly easy as I have time until October 15th, 2020, I can do recharacterization or carry forward to next year. In either case, I can even avoid 6% excise tax and 10% withdrawal penalty (before 59.5 years old).

But how do I fix the 2018 one? Technically, the excess of 2018 can be moved to 2019 contribution limit.  Do I need to file Form 5329? Do I need to recharacterize 2018 contribution + earning also?

[DanaB27]

Yes, for 2020 you can recharacterize the excess contribution (no penalty) or apply it to next year (here you would still pay the 6% penalty for 2020). Please see What happens if I made a ROTH IRA contribution but my modified adjusted gross income exceeds the lim... for details.

For the 2018 excess you could apply the excess as a 2019 contribution. You will have to amend your 2018 tax return and enter the Roth IRA contribution. TurboTax will then calculate the 6% penalty for the excess contribution on Form 5329. 

You will also have to amend your 2019 tax return to apply the excess contribution as a 2019 contribution during the IRA contribution interview.

Please see How to amend (change or correct) a return you already filed.

[vijay-saikrishna]

@DanaB27 

When I apply 2018 contribution towards 2019, what happens to the earnings on those excess contributions?

Will it automatically be handled the Roth IRA manager/administrator, which transferring 2018 earnings to 2019? 

Will there be extra penalty on the earnings? Since I'm not withdrawing (younger than 59.5 years), in a hypothetical case I shouldn't be penalized. I can get away with just 6% penalty on the excess contribution amount.

If I'm getting penalized on the earnings then my best best would be recharacterizing 2018 contribution + earnings to traditional IRA like the case in 2020.

[DanaB27]

You do not have to tell your bank anything about applying the 2018 contribution towards the 2019 contribution. The contributions and earnings are staying in the Roth IRA account.  It is all done on your 2019 tax return that you apply the excess contribution to your 2019 contribution during the interview.

You will only pay the 6% penalty on the 2018 tax return for the excess contribution.

You cannot recharacterize your 2018 contribution. A contribution must be recharacterized on or before your tax-filing deadline for the year for which it was made (for 2018 this was October 15, 2019).