Overcontribution to ROTH IRA

[Structure]

Hello,

In 2018 I contributed the max to my ROTH IRA ($5,500) and have obviously already filed my taxes.  I also contributed the max in 2019, however, I've not yet filed my 2019 return.

Due to my filing status (Married, but filing separately) I found out in early 2020 that I am not eligible to contribute to a ROTH IRA at my earned income level.  I therefor had to remove my 2018 contribution & earnings and also my 2019 contribution and earnings.  My brokerage handled this with an ESA Excess contribution form in January 2020.

 However, since this actually occurred in 2020 my brokerage is not reporting this on their 2019 paperwork or tax forms they generated for me.

I am aware that I will need to pay a 6% penalty on the 2018 earning & 10% early withdrawal fee.  NO fee's on the actual contribution amount though?  Since the 2019 was withdrawn before filing there should be no 6% penalty - only a 10% fee on the earnings associated with that. 

My brokerage said that I would need to complete Form 5329 or Form 8606 to document this. 

-Should this be filed with my 2019 return or should I wait until 2020 to file this? 

-Will Turbo tax handle the calculations for me on these forms?

-Do I need to revise/amend my 2018 return I filed with Turbo Tax?

-Which version of TurboTax is recommended for this or is it very complicated?

Thanks!

[dmertz · Accepted solution]

"I therefor had to remove my 2018 contribution & earnings"

As you indicated, 2020 is too late to obtain a return of contribution before the due date of your 2018 tax return, so an excess contribution made for 2018 distributed in 2020 was properly be done by making a regular distribution of the amount of the excess.  Earnings on the 2018 excess were not required to be distributed; having included the earnings in the distribution simply means that the amount of the regular distribution was more than was necessary to correct the excess.  The excess contribution made for 2018 is still subject to an excess contribution penalty for 2019, there is nothing that can be done about that, but the regular distribution in 2020 eliminates the penalty for 2020 and beyond on the 2018 excess.  This distribution will be reportable on your 2020 tax return by entering the code J 2020 Form 1099-R into 2020 TurboTax.  Because the excess contribution still added to your Roth IRA contribution basis, this regular distribution will be nontaxable and not subject to any early-distribution penalty at least up the amount of the excess contribution.  Some or all of the earnings will also be nontaxable and not subject to  an early-distribution penalty if you have other basis in Roth IRA contributions from past contributions that you were eligible to make, but if you have no other basis in Roth IRA contributions the earnings will be subject to the income tax and a 10% early-distribution penalty that you mentioned.

As for your 2019 excess contribution, you'll need to enter into 2019 TurboTax a made-up 2020 Form 1099-R with codes J and P showing the gross amount (excess + earnings) in box 1 and just the earnings in box 2a.  TurboTax should prompt you to enter an explanation for the return of your 2019 contribution which will be included with your tax return.  If taxes were withheld, do not enter that amount into 2019 TurboTax, that way TurboTax won't include any of the details of your made-up form and TurboTax will only include the taxable result.  Any tax withholding will be credited on your 2020 tax return.  2019 TurboTax will include the entire gross amount on Form 1040 line 4a but will include only the earnings on line 4b and on Form 5329.

In the unlikely event that taxes were withheld from the return of the 2019 contribution, you'll also have to enter the code JP 2020 Form 1099-R into 2020 TurboTax to get credit for the tax withholding, otherwise you can ignore the actual code JP Form 1099-R when it arrives.  If you do enter it into 2020 TurboTax, 2020 TurboTax will remind you that the earnings were reportable on your 2019 tax return which you will already have done by entering the made-up Form 1099-R, so there will be no need to amend your 2019 tax return.

[Structure]

Wow seems a bit confusing.   So I only need to report the earnings on the 2019 distribution for my 2019 tax filing?  And I can wait to report to 2018 withdrawl on my 2020 tax filing?  

Also there is no need to amend my 2018 filing?

Thanks!

[dmertz]

Correct, except that the excess contribution for 2018 needs to be reported on a 2018 Form 5329; I forgot to mention that.  You might be able to file the 2018 form 5329 stand-alone, but it might be good to file it with 2018 Form 1040-X to show that there are no other effects on your 2018 tax return.