I need help with an excess contribution to ROTH IRA in 2018... does my TurboTax subscription allow me access to someone who can help with that?

[DJS]

The penalty for an ineligible contribution is 6% of the excess amount. You pay this penalty when you file your income tax return using IRS Form 5329.

If you don’t fix the mistake, you’ll owe the penalty each year the excess remains in your account. If you’re not eligible to take a qualified distribution from your IRA to fix the mistake, you’ll pay an additional 10% early withdrawal penalty on earnings (interest).

How to Calculate Excess Contributions

The IRS provides a specific formula to calculate earnings (or losses) attributable to an excess contribution.

Net income=excess contribution× (ACB−AOB)/ AOB

​         where:

AOB=Adjusted Opening Balance

ACB=Adjusted Closing Balance

Adjusted Opening Balance: The previous IRA balance plus all contributions (including the excess one), consolidations, and transfers into the account since the contribution occurred.

Adjusted Closing Balance: The current value of the IRA minus all distributions, consolidations, and transfers since the contribution occurred.

Excess Contribution Example

Here's an example that illustrates a mistake and how to apply the formula to calculate earnings:

Mary contributed $3,000 to her traditional IRA last year. When filing her taxes, she realizes she was only eligible to contribute $2,000 because she only had $2,000 in earned income for the year. She requests to remove the $1,000 excess.

Before the contribution, Mary's IRA balance was $12,000 and it's now worth $18,000. She didn't make any additional contributions or distributions. Her adjusted closing balance is $18,000 and her adjusted opening balance is $15,000 ($12,000 + $3,000). She uses the IRS formula to determine the earnings:

​=$1000×($18000−$15000)/$15000

​=($1000×$3000)/$15000

​=$200 earnings​

Mary will remove $1,200 ($1,000 excess contribution plus $200 earnings attributable to the excess contribution).

How to Fix an Excess IRA Contribution

There are several ways to correct an excess contribution to an IRA.

• Withdraw the excess contribution and earnings. In general, you can avoid the 6% penalty if you withdraw the extra contribution and any earnings before your tax deadline. You must declare the earnings as income on your taxes. Also, you may owe a 10% tax for early withdrawal on the earnings if you're younger than 59 ½.
• File an amended tax return (if you’ve already filed). You can avoid the 6% penalty if you remove the excess contribution and earnings and file an amended return by the October extension deadline.
• Apply the excess to next year’s contribution. Doing this on a future tax return won’t get you off the hook for the 6% tax this year, but at least you’ll stop paying once you apply the excess.
• Withdraw the excess next year. If you don't do one of the other options first, you can withdraw the excess funds by Dec. 31 of the following year. You can leave the earnings in, but you must remove the entire excess contribution to avoid that 6% penalty for the following year.

[Ventura]

I see your reply:

"Withdraw the excess next year. If you don't do one of the other options first, you can withdraw the excess funds by Dec. 31 of the following year. You can leave the earnings in, but you must remove the entire excess contribution to avoid that 6% penalty for the following year."

My question is when do withdraw the excess in the next year, is the withdraw taxable? Which year's income?

[AmyC]

@Ventura Yes, when you withdraw the excess funds, you will receive a 1099-R for that year of withdrawal. It will be taxable.

[seven of 9]

I made a contribution to my Roth IRA in 2019 which was withdrawn with earnings in early March 2020, well before the deadline.  The 1099R will not be available until next year; however, I was able to obtain the information from the custodian to proceed with filing my taxes.

TT ,  incorrectly imposes a 10% penalty although I am 65. Any help or explanation would be appreciated.

[dmertz]

If you are over age 59½, to eliminate the early-distribution penalty on the taxable earnings you must claim an "Other reason" exception to the penalty on this amount.  This is one of the few and probably the most common of the "other reasons" that are acceptable.  This is necessary because the IRS requires code J (early distribution) along with the code P regardless of age to indicate that the return of contribution is from Roth IRA.

To claim the exception, go to Other Tax Situations -> Additional Tax Payments -> Extra tax on early retirement withdrawals and enter the Form 1099-R box 2a amount in the box labeled "Another reason."

[vcwu]

In your Example for Mary:

If Mary has done  a rollover of 1,000 between the contribution date and the " removal date",  how is AOB and ACB calculated?   Assume the final balance is still 18000  including the 1000 rollover amount (investment gain is 2000)

AOB  = 15000+ 1000 =16000

ACB  = 18000  (no change?):

NI:  1000x (18000-16000)/16000 = 125

1) Is  NI and ACB   correct ?     

 2) When the withdraw is done in early 2019  for 2018 excessive contribution, would the NI be  reported  in       Tax Year 2018 (initial filing /amended return)  or  make life simple - report it in  Tax Year 2019 ( as the year the NI was withdrew).  

[dmertz]

1.  Yes, that's correct.

2. By law, the NI in this case is reportable on the 2018 tax return, not on the 2019 tax return.  The 2019 Form 1099-R reporting this distribution will have codes J and P, where the code P indicates that the taxable amount shown in box 2a is to be reported on the tax return for the year prior to the year of the Form 1099-R.

[vcwu]

In this case,  if the person is over 59  1 /2  when he   removed the excessive Roth contribution. Would the calculated Net Income still be considered as taxable income ?   I read somewhere that they  may consider that "income amount"   as distribution.    And if this is the case, it would be taxable (from Roth) and won't  change the AGI for the year.  

[dmertz]

For someone over age 59½, the net income distributed with the returned Roth IRA contribution is still taxable but is not subject to an early-distribution penalty.  Because a return of contribution from a Roth IRA includes code J in box 7 to indicate that it is from a Roth IRA, someone over age 59½ at the time of the distribution must claim an Other reason exception on Form 5329 for the amount of taxable net earnings (the amount on box 2a of the Form 1099-R) that were distributed.

[bolinda]

I contributed $7000 for my 2020 Roth.  What number do I enter in Turbo Tax under "contribution withdrawn before the due date of your return"?  $7000 or $7000 and whatever I earned?  Thanks.

[dmertz]

$7,000.

[Sevenof9]

You failed to mention if and when the excess contribution was withdrawn. IRS allows up to the filing date for excess contribution withdrawals, which this year was deferred from April 15, 2021 to May 17,2021.  The excess contribution may have accrued interest, dividends and capital gains which would be reported on a 1099-R if withdrawn prior to 12/31/20. Otherwise you will not receive one until next year. However, the institution can provide the information to file for this year. Make sure all details are provided, especially the distribution code (box 7).

[jmc2021]

I just want to make sure I have this right. If I accidentally over contributed to my Roth IRA for 2020, I need to take out the 2020 & 2021 contributions and any gains made in 2020 and 2021? Wouldn't that end up wiping out any 2020-2021 gains made on the money that had been contributed before 2020? If I withdraw it before the tax filing deadline, do I report any of this on the 2020 tax return? Or are all the gains that I've taken out for 2020 & 2021 just reported next year on my 2021 tax return?

[ErnieS0]

If you overcontributed to a Roth IRA in 2020 you have to withdraw the overcontribution by May 17, plus earnings. Or you can recharacterize the contribution as a nondeductible Traditional IRA contribution and do a backdoor Roth.

If you were ineligible to make any contributions for 2020 then you would have to withdraw whole thing. Otherwise you just have to withdraw the excess.

2021 is a different year and it's not over. If you think you will be over the limit by year end, then you can withdrawal 2021 as well. Or make a nondeductible Traditional IRA contribution. But that's a separate year.

Your withdrawals will not wipe out gains from previous years. You only have to withdraw any earnings tied to your overcontributions.

Withdrawals are reported by calendar year so you will receive a 2021 Form 1099-R next year for your withdrawal because it happened it 2021. Roth contributions are after-tax so you would only pay on the earnings.