Excess 2016 and 2017 Roth IRA contributions. How to fix?

[ramsgusom]

I am not allowed to make any direct roth IRA contributions. But by mistake I had contributed for 2016 and 2017. And when I look back at my tax returns, I never mentioned these contributions.

Last month I withdrew both my 2016 and 2017 Roth IRA contributions (along with associated gains). This means I'll be getting my1099-R next year. My question is... what is the next step?

Do I need to amend my 2016 and 2017 returns? Or can I just pay the penalty along with my 2019 return? If I have to amend, do I amend now or after I receive my 1099-R next year? Will it change my penalty if I do it this year vs next year? I was told that if I remove my excess contributions by the 2018 tax deadline, I don't have to pay penalty for the 2018 tax year. 

What part of the 2016/2017 mess do I mention in my 2018 return? Do I just not mention anything and wait till next year to deal with it? Do I pay the penalty now or do I I wait till next year to pay the penalty? (6% per year that the excess is not withdrawn, plus 10% on earnings)

Please advise.

[andyeda]

amend return now

[dmertz]

You must file 2016 and 2017 Forms 5329 to report and pay the excess contribution penalties associated with the excess contributions.  On the 2016 Form 5329 you'll have a penalty of 6% of the amount that you contributed for 2016 and on the 2017 Form 5329 you'll have a penalty on 6% of the sum of the contributions made for 2016 and 2017.

You'll also have 2018 From 5329 reporting the same excess (2016 excess contribution plus 2017 excess contribution) as on the 2017 Form 5329 and pay the same amount of excess contribution penalty with your 2018 tax return.

The distribution made in 2019 will be reportable on your 2019 tax return.

These excess contributions were correctable in 2019 by a regular distribution of exactly the amount of the excess, with no adjustment for earning.  The distribution of the actual excesses is not taxable because it is a distribution attributable to your contribution basis, but the earnings distributed will be taxable and potentially subject to early-distribution penalty if you have no other Roth IRA contribution or conversion basis to apply to the amount distributed in excess of the amount of the excess contributions.

[ramsgusom]

The first paragraph was helpful. But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline.

[dmertz]

You did *not* receive distributions of the excess contributions before the dues dates of your 2016 and 2017 tax returns, respectively.  Because these excess contributions were not corrected before the end of 2018, you owe the same penalty for 2018 as you owe for 2017.  Excess contributions corrected after the due date of your tax return are only corrected for the tax year in which the distribution of the excess occurs and subsequent years.

I've added to my answer describing how these excess contributions should have been corrected in 2019.

[macuser_22]

 "But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline."

That only applies to the year in which the excess contribution was made - in this case, *2016* that had to be withdrawn before the 2016 due date (April 15, 2017).   After that, the 2016 excess must be removed before the end of the next tax year (Dec. 31, 2017) to avoid the 2017 repeating penalty - the same thing applies to the 2017 excess contribution had to be removed before Dex 31, 2018 to avoid the 2018 penalty.

You now have (had) until Dec. 31 2019 to remove all excess to avoid the 2019 penalty (that you did with the 2019 distribution).

[ramsgusom]

I just got off the phone with the turbotax CPA, and she says I don't have to amend previous returns. Just wait till I get the 1099-R next year and pay the penalty along with my 2019 return. But you guys are saying I have to amend 2016/2017 and attach Form 5329 for each?

Who is correct?

[macuser_22]

Since the excess was removed in 2019, there will be *no* 2019 penalty to pay at all.  It is not possible to report and pay a prior years penalty on a 2019 tax return.

A 2017 penalty can *only* can only be reported and paid on a 2017 5329 form, likewise for a 2018 penalty.

Either whoever you talked to did not understand the situation, that this is not a 2018 contribution removed in 2019, or they answered incorrectly.

IRS 5329 instructions:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i5329.pdf">https://www.irs.gov/pub/irs-pdf/i5329.pdf</a>
"Prior tax years. If you are filing Form
5329 for a prior year, you must use the
prior year's version of the form. If you
don’t have any other changes and
haven’t previously filed a federal income
tax return for the prior year, file the prior
year's version of Form 5329 by itself
(discussed earlier). If you have other
changes, file Form 5329 for the prior
year with Form 1040X, Amended U.S.
Individual Income Tax Return."

Because, there will be "other changes"  - the added penalty and overall tax due - amending is necessary.

[ramsgusom]

Okay. You sound like you know what you are talking about. Is this something I can do on turbotax or should I just go to a CPA?

For the 2016/2017 amendments, is it just the 5329 form, or does the amendment involve other complicated forms?

[dmertz]

CPAs are often not well versed in the parts of the tax code involving less common retirement-account situations.

Assuming that it doesn't affect any other part of your 2016 and 2017 tax returns, such as a mistakenly haven taken Retirement Savings Contributions Credit based on these contributions (it appears that you did not), you might be able to file the 2016 and 2017 Forms 5329 stand-alone, but the IRS sometimes asks that you include Form 1040X and Schedule 4 to show this change to Other taxes and to provide explanation.  Either way you'll need to pay the penalty calculated on each of these Forms 5329.

You'll file your 2018 Form 5329 with your 2018 tax return and the penalty on that form will be included in determining your refund or balance due.

With your 2019 tax return you have 2019 Form 8606 Part III reporting the regular distribution and applying your Roth IRA contribution and possibly Roth conversion basis to determine the taxable amount, if any.  You'll also have a 2019 Form 5329 reporting this distribution as correcting the excess carried from 2018 into 2019, leaving you with $0 of excess and $0 of penalty.

[macuser_22]

If you want to try filing the 2016/2017 5329's as a stand-alone form without amending then you can get the blank 2016/2017 5329 here:

2016 Form:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/f5329--2016.pdf">https://www.irs.gov/pub/irs-prior/f5329--2016.pdf...>
2017 Form: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/f5329--2017.pdf">https://www.irs.gov/pub/irs-prior/f5329--2017.pdf...>
2016 Instructions: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/i5329--2016.pdf">https://www.irs.gov/pub/irs-prior/i5329--2016.pdf...>
2017 Instructions: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/i5329--2017.pdf">https://www.irs.gov/pub/irs-prior/i5329--2017.pdf...>
Where to mail: <a rel="nofollow" target="_blank" href="https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1...>

[ramsgusom]

that was beautiful. thanks a lot.

[ramsgusom]

I had a question about the 5329 - Do I have to pay the 10% penalty on the earnings for every year I file the 5329

For example, I contributed $3000 towards 2016 Roth IRA and $4000 towards 2017 Roth IRA. When I withdrew the amount in 2019, there was a net profit of $300.

When and how am I paying the 10% penalty on earnings?

[macuser_22]

Since the distribution of the excess is a normal distribution and not a "return of contribution" distribution, only the contribution amount itself needs to be removed.  The earnings can stay in the account because the penalty has been paid on the 5329 form.

If the earnings were/are aslo removed, and the 2019 1099-R amount is (or will be) the total contribution plus the earnings then any amount distributed in 2019 that exceeds your own prior total contributions (including the excess contributions) will be taxable in 2019 and subject to the 10% penalty if under age 59 1/2.

You can always remove your own prior contributions (not previously removed) tax and penalty free.

On the 5329 you only enter the excess contribution amount, not any earnings.

[ramsgusom]

Perfect. Thank you