I realized that I've contributed to a roth IRA for the last 2 years, when I am technically not allowed to, due to the income limits. How do I fix my 2019 returns?

[AT25]

Can you elaborate? What do you mean the tax code doesn't permit? Like there is a rule that states I can't recharacterize in 2019?

@dmertz @Opus 17 

To provide a bigger context:

-2018: 4,500

-2019: 6,000

-2020: 6,000

-2021: 6,000

Total contributions: 22,500

In 2018, I made a contribution which was allowed under my income limits. Since then, I've been contributing when I shouldn't have based on my increased income. I made stock purchases starting in 2019 which combined my 2018 contribution. Since then, my total roth IRA has appreciated to ~$28K. So I've made ~$5.5K, which I'm sure makes my situation a little more tricky....

So based on your guys' input, it seems like I can only recharacterize 2020 and 2021? Can you advise why that is? I'll have a very pleasant call with Schwab with the person previously telling me incorrect information...:)

All in all, I'm looking for the most cost efficient and quick way to resolve my mistakes. Appreciate all of your responses so far. Please excuse my lack of knowledge on this stuff 😕

@dmertz do you have any recommended sequence of actions I take, different/similar than @Opus 17 

[dmertz]

Moving a contribution from a Roth IRA to a traditional IRA is a recharacterization of the contribution.  Section 408A(d)(6)(A) of the tax code sets the deadline for recharacterizing a contribution as the due date of the tax return, including extensions, for the year that the contribution was made.  With respect to a contribution made for 2019, that was October 15, 2020, which as passed.  Therefore, the 2019 contribution cannot be moved to a traditional IRA, it's too late to do so by 5 months.

It would obtain the $6,000 regular distribution of the 2019 after doing the recharacterizations of the contributions made for 2020 and 2021.  This makes it slightly easier for Schwab to calculate the net income attributable to the 2020 and 2021 contributions.

[AT25]

@dmertz 

Yeah, that seems to be the plan. I was on another call with Schwab to go over the re-characterization forms.

2019, 6K will be pulled out and moving to another brokerage account

2020 and 2021, $12K roth contributions will recharacterize as traditional ira

Regarding tax amendments now (which I have no idea how to do):

For 2019, do you or anyone else have experience amending with TurboTax? My assumption is that I think Schwab will give me a tax form for 2019 and I will need to make some adjustments. Just have no idea how to do it. 

For 2020, amendments are pretty easy to do right? Since I filed already, I'm going to guess I need to go back and update with whatever Schwab forms they give me.

Appreciate any step-by-step walk through on the amendments. Thanks everyone for the help so far! 

[dmertz]

Nothing that Schwab gives you has anything to do with your 2019 tax return.  Your 2019 tax return just needs to include Form 5329 to report the excess contribution made for 2019.  Although you could use TurboTax, amending 2019 might be most easily done simply using 2019 Form 1040-X and 2019 Form 5329 downloaded from the IRS.

For 2020 you'll need to amend by entering the code PJ 2021 Form 1099-R that you anticipate receiving near the end of January 2021.

Regarding amending using TurboTax:

https://ttlc.intuit.com/community/amending/help/how-to-amend-change-or-correct-a-return-you-already-...

For 2021 you'll already have the code 8J 2021 Form 1099-R by the time you prepare your 2021 tax return.

[AT25]

@dmertz Thanks for the details.

Because the cash in each of the years is tied into stocks, am I putting just the fixed qty of $6K each year on the tax forms? Or do I wait for Schwab to calculate the removal of excess and recharacterization, likely more than $6K due to appreciation of stocks?

Regarding your statement: 

For 2020 you'll need to amend by entering the code PJ 2021 Form 1099-R that you anticipate receiving near the end of January 2021.

Can you provide some more info? Will look into these forms and codes later today. Jan'21 has already passed, is this form something Schwab provides? Sorry for my lack of knowledge. 

[dmertz]

The type of investment is irrelevant.  The amount you are distributing for 2019 is $6,000.  The amount of your 2020 and 2021 contributions that you are recharacterizing is also each $6,000 regardless of the investment performance.  The investment performance attributable to your 2020 and 2021 contributions only determines the adjusted amount that gets transferred to the traditional IRA.

There are no Forms 1099-R related to any of this to be entered on your 2020 tax return.  Your 2020 tax return should only include an explanation statement describing the recharacterized 2020 contribution.

[AT25]

@dmertz Understood on the contributions for 2020 and 2021 since they are going into traditional IRA accounts anyway. 

What about 2019? Once Schwab helps me calculate what the $6K contribution equates to, do I need to do anything about the appreciation? Or is it because it is a Roth account, that the money will just transfer to a regular brokerage account.

Regarding your statement on the 2020 tax return needing an explanation statement. Where exactly do I do that? Is that in TurboTax? Or is this something I need to send to the IRS?

[dmertz]

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What about 2019? Once Schwab helps me calculate what the $6K contribution equates to, do I need to do anything about the appreciation?

---

No!  Schwab has no business doing any calculations in regard to the 2019 excess contribution.  The corrective distribution for the $6,000 excess contribution for 2019 is a regular distribution of exactly $6,000.  In fact, the safest thing to do to avoid Schwab mistakenly doing any calculations in regard to the 2019 excess contribution is to simply request a regular $6,000 distribution with no mention that it is to correct an excess contribution.  They don't need to know why you are making a regular distribution.

Of course for the returns of the 2020 and 2021 contributions, Schwab does need to know that these are to be returns of contributions before the dues dates of your 2020 and 2021 tax returns, respectively, and they will need to do the gain/loss calculation separately for each of these.

[Opus 17]

Your last step, after all the corrective distributions, is to take a regular distribution of $6000 from the Roth IRA.  That represents the removal of the excess from 2019.  You have to take it as cash, you can't take it in-kind.  What you do with it after that is an entirely separate issue (put it in a bank, or regular broker account, or buy rare Air Jordan sneakers, it doesn't matter).

For the amended 2019 return, you need to report the 2019 Roth contribution.  If, based on your income and other situations, the contribution is considered excess, then Turbotax will ask you if you plan to remove the excess by April 15, 2020 (because the software is still stuck in 2019).  You will say "no", and Turbotax will calculate the 6% penalty on form 5329.  You won't get anything from the broker for this.  

In fact, it seems you did not report the contribution originally on your 2019 return or this would have been caught already.

For the amended 2020 return, when you report the 2020 contribution, the program should warn you it is excess and will ask if you plan to remove it before April 15, 2021, you will say yes, and when it asks how much you will remove, you will indicate the entire $6000.  (This is what will be reported on your 1099-R when you get it.). You don't report the appreciated amount removed, just the principle amount removed.   On your 2020 return you should also be asked if you had excess from a prior year that was not corrected, you will report the $6000 from 2019, and Turbotax will calculate another 6% penalty of that amount.    (Normally this would carry forward but it won't in your case since you already filed a 2020 return and you can't link the form 5329 from the amended 2019 to the amended 2020, so you will have to enter that information manually.)

Here are the amending instructions

https://ttlc.intuit.com/community/amending/help/how-do-i-amend-my-turbotax-online-return/00/27577

https://ttlc.intuit.com/community/amending/help/how-do-i-amend-my-return/01/27439

[AT25]

@Opus 17 @dmertz 

Thanks for both your inputs.

For 2019, when I talked to the Schwab consultant yesterday, they said that I would still fill out their forms to remove the excess in 2019. Like I mentioned, the 2019 contribution was $6K, but has appreciated since they've been in stocks. Supposedly, if I go their route, Schwab will be determining what the 2019 $6K amounted to, then will move it to my regular brokerage account. 

Does that make sense? Or do I need to question the consultant as well since Schwab might not have it together lol. I don't think I can just take $6K out of my Roth. I don't think its apples to apples like that since I already invested it in stocks. Again, appreciate your inputs. I'll have more time to review this weekend.

[dmertz]

The 2019 excess contribution is resolved by making a regular distribution of $6,000.  The only thing you have to do for this with regard to any Schwab form is fill out a form requesting a regular distribution of exactly $6,000, although hopefully Schwab would be competent enough to do this even if you request it as a distribution of an excess 2019 contribution.  With regard to the correction of the 2019 excess contribution, Schwab must distribute exactly $6,000 as a regular, code J distribuion.  There must be no adjustment for investment gain or loss.

I don't think I can just take $6K out of my Roth.

---

This is indeed exactly what you must do with regard to the 2019 excess.  Adjusting for gain or loss is mutually exclusive with paying the 6% penalty on the 2019 excess which you must do on your 2019 and 2020 tax returns.

[AT25]

So for 2019, if it is tied in stocks, I need to have Schwab or myself sell stocks equivalent to 6K then take out the $6K to match it to the 2019 overcontribution? On the 6K contribution how do I report or account for the gains I made on that money?

To pay for the 6% penalty, is that something I do with the forms mentioned above? Or it is a separate action. 

[dmertz]

I have no more to add to what I've already said.

[AT25]

@Opus 17 @dmertz 

Hi both, 

It took some time clarifying with Schwab, but I was able to do what I was planning. Your guys' earlier responses definitely were correct, it just took me awhile to fully understand it. 

What I did:

2019: remove $6K excess, ~$1K earnings, total $7K. I will amend my 2019 taxes and pay the 6% penalty of $360 on my excess contribution. I will pay the penalty of $1K on my 2021.

2020: recharacterized $6K excess, ~$1K earnings, total $7K. My question here, when I amend 2020, do I need to report or get taxed on the excess in the $1K? Is that going to affect any forms for 2020 or 2021?

2021: recharacterized $6K excess, -$0.5K loss, total $5.5K. For 2021 taxes, I believe I just need to mention that this value was re-characterized. 

The Schwab person told me that when I get my 1099 from them for 2021, it will have all the transactions (from 2019-2021). I'm hoping it is easy (?) to adjust the Schwab import or note in TurboTax that majority of the money is post-tax dollars, and 2020/2021 have been rolled into a traditional IRA. 

Regarding paying the 6% on 2019. I know I have to pay it for 2019. Do I need to pay it also for 2020? Or can I say that because we are working on tax year 2020 right now, that it will be fixed by then? (Just trying to pay as little penalty as possible)

Appreciate the help.

[ReneeM7122]

Yes, if you pay the 6% now for 2019, you won't owe it in 2021. Here's another thread with more information about excess IRA contributions.

@AT25