Multiple years of ineligible Roth IRA contributions

[ruibing]

I found out in 11/2022 that I wasn't eligible for the Roth IRA contributions I made in 2017-2021. I was also not eligible in 2022, but thankfully I did not contribute. This mea culpa was due to me not paying enough attention to change in my income after changing jobs. As soon as I realized this, I filled out Vanguard's excess contribution removal form for each year and they moved the contributions to a nonretirement account. I received a 1099-R (Box1: total contribution amount that was removed, Box2a: empty, Box 2b: checked, Box 7: J).

From reading the related community posts and IRS form instructions, I think I understand what I have to do but I just wanted to run through. Please let me know if there's any errors. Hopefully, this will also help others in the future.

• Amend 2017 with 5329. Paying 6% tax on the excess contribution from 2017.
• Amend 2018 with 5329. Paying 6% tax on the excess contribution from 2017+2018.
• Amend 2019 with 5329. Paying 6% tax on the excess contribution from 2017+2018+2019.
• Amend 2020 with 5329. Paying 6% tax on the excess contribution from 2017+2018+2019+2020.
• Amend 2021 with 5329. Paying 6% tax on the excess contribution from 2017+2018+2019+2020+2021.
• Each amended return would be mailed in a separate envelope
• File 2022 with 5329 and 8606
  • 8606 Line 19: total distribution from 1099-R Box 1
  • 8606 Line 22: Net contributions to Roth IRA since it was opened over a decade ago
  • 8606 Line 23: 0 because the distribution was less than the total contribution
  • 5329 Lines 1-4: empty because there's no tax for withdrawing contributions from Roth IRA  (i.e. no double taxation)
  • 5329 Line 18: total excess contributions from 2017-2021
  • 5329 Line 19: 0
  • 5329 Line 20: total distribution from 8606 Line 19
  • 5329 Line 22-25: 0 because the excess was withdrawn before end of 2022
  • No 10% tax on early distribution for federal or state and no 6% tax on the excess contribution for 2022

[DanaB27 · Accepted solution]

Yes, this is all correct. 

Please make sure you use the correct year for each Form 5329. You can look up the prior year's Form 5329 here.

[ruibing]

Yes, I am using each year's corresponding 5329 along with the matching1040-X (July 2021 revision for 2019+ and January 2020 revision for 2018 or earlier).

I do have a few follow-up questions regarding amending returns for 2017-2021:

1) The amended return generated by TurboTax is pretty extensive but, if the only thing changed is the 5329 form, do I only need to mail in 1040-X and 5329?

2) I seem to be able to e-file for 2020-2021. Should I e-file those and mail the rest or just mail them all?

[DanaB27]

1) Yes, you only need to file Form 1040-X and any forms that change (Form 5329 and Schedule 2) when mailing an amended return.

2) Yes, you can try to e-file the 2020 and 2021 amended returns. Please be aware, some customers had issues e-filing prior years' returns. It is supposed to be fixed by next week. Otherwise, you will have to mail all amended returns.

@ruibing 

[ruibing]

What is the e-filing issue for prior years' returns? I haven't file 2020/2021 yet but they wouldn't let me proceed if I chose direct debit for payment.

[ruibing]

Can you please double check one more thing for me?

I was under the impression that because I took the ordinary distribution before the end of 2022, I wouldn't have to pay the 6% penalty on the excess contributions in my 2022 return. This seems to match 2022's form 5329.

Then I stumbled upon https://ttlc.intuit.com/turbotax-support/en-us/help-article/form-1099-r/happens-made-excess-roth-ira... and the wording regarding removing the excess contribution after the tax deadline confused me.

[fanfare]

when you resolve the excess in 2022 and report it on your 2022 Form 5329, the penalty goes away.

@ruibing 

[Eyeman2]

I have been making ineligible contributions since I believe 2019. In 2021 I rolled over a Cash Balance Pension plan into my Roth IRA as well paying taxes on it in 2021. In 2022 I moved the whole Roth IRA to a different investment firm, I did not contribute to this account after that. My questions is if I just withdraw the money instead of characterization what are the differences in taxes or penalties I am looking at?

[DanaB27]

You cannot recharacterize a contribution after the due date. You will have to pay the 6% penalty each year on Form 5329 since you haven't removed the excess contributions. You also will have to pay the 6% penalty on your 2024 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution 

To remove the excess contributions and avoid the 6% penalty for 2025 request a regular distribution without earnings or losses before December 31, 2025. 
 

On your 2025 tax return you will report the 2025 Form 1099-R and this will remove the excess contribution:

1. Click on "Search" on the top and type “1099-R” 
2. Click on “Jump to 1099-R” and enter all your 1099-Rs
3. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
4. Answer "Owned Any Roth IRA for Five Years?" screen
5. Continue through the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen (include the excess contributions).

@Eyeman2