@kmpeterson7260 wrote:
Again, thank you so much for your help! I really appreciate it. What does "remove as a normal distribution" mean? Would this be doing a simple withdraw from my account for the same amount I contributed in excess?
A little more backstory: I didn't learn about contribution rules to Roth IRAs until February 2020 when I was doing my 2019 taxes. I had contributed $6800 in excess in 2019 but I didn't realize I needed to withdraw any of the money from my account. I didn't withdraw any money at that point and paid my 6% penalty on my 2019 taxes and thought I was done with that issue. I had already made a contribution of $1500 to the Roth IRA in the 2020 tax year by that point as well. Then, as I was working on my 2020 taxes I realized I would need to pay the 6% penalty for both 2020 and 2019 contributions.
I'm not sure how much my earnings are. It says they will be calculated by Fidelity after I submit my request to withdraw excess contribution.
I've begun my request to withdraw the excess from the 2019 tax year on Fidelity's website. It says this is a taxable event since this is after the tax deadline. I will "owe a 6% penalty on the amount of the excess contribution for each year it has remained in your IRA and was not corrected". I already paid the 6% penalty last year on my 2019 taxes. Since I'm removing it now do I need to pay the 6% penalty again on my 2020 taxes? Or do I avoid the penalty since I'm fixing the excess before my 2020 taxes are due?
This additional informant changes everything.
You have until the due date of the tax return (or extended due date if a timely extension was filed) to remove the excess plus earnings to avoid the 6% penalty that repeats each year that the excess remains . For 2019 the due date was April 15, 2020 (extended to Jun 15 because of COVID-19), and the extended due date was Oct 15, 2020. After that the 6% penalty applies.
You only had until June 15, 2020 to remove a 2019 excess as a "return of contribution" or until Oct 15 if you filed a timely extension - both of which have passed, so after that the excess can ONLY be removed as a normal distribution AND you will need to file a 2019 5329 form paying the 6% 2019 penalty. If you also did not remove the 2019 excess by Dec 31, 2020, you will also owe another 6% penalty on a 2020 5329 (the penalty repeats each year until removed).
The difference is a "return of contribution" and earnings are calculated by the financial institution and reported on a 1099-R with the returned amount in box 1 and the taxable earnings in box 2a and a distribution code of P or 8 that indicates to the IRS that is is return and year that it is taxable.
A normal distribution just returns the excess money to you the same as any other distribution with the distributed money in box 1 and a distribution code of J, Q or T depending on your age.
A normal distribution DOES NOT return the earnings which can stay in the IRA because the 6% penalty must be paid.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
