(Questions Edited) Excess ROTH IRA contribution for 2018 and 2019

[PandaPo]

I'm still a little confused after looking through similar questions on the forum and talking to my financial advisor on how to rectify excessive ROTH IRA contribution for 2018 and 2019. I just noticed having excessive ROTH IRA contribution due to income limits now (MAR 2020). 

For 2019 contribution, since I haven't filed 2019 returns yet, I'm working with the banking institute to remove/withdraw $6000 in contribution and any associated earnings. I can then file 1099R using excess contribution for box 1, earnings (calculated from banking institute) for box 2, and code JP box 7, corrected? Do I do the same if it generated a loss?

For 2018 contribution, can I carry this over to ROTH IRA contribution for 2020 if I'm eligible for contribution in this? If so, what do I need to do? If not, then I need to remove/withdraw the 2018 excess contribution and associated earnings correct? What do I need to do/file with my 2019 return to avoid 6% penalty in 2019 and onward?

For the excess 2018 contribution, was 6% tax already penalized and taken out once I filed 2018 Returns for 2018? Or should I be expecting a debt from IRS sometimes down the road for both penalty for year 2018 and 2019?

[PandaPo]

Edited to encompass 2018 and 208 ROTH IRA excess contribution concerns.

Glad Turbo Tax calculates and prompts the excessive warning now. Wish it was already there when I filed 2018 returns.

[macuser_22]

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@PandaPo wrote:

For 2019 contribution, since I haven't filed 2019 returns yet, I'm working with the banking institute to remove/withdraw $6000 in contribution and any associated earnings. I can then file 1099R using excess contribution for box 1, earnings (calculated from banking institute) for box 2, and code JP box 7, corrected? I will still do the same if it generated a loss?

For 2018 contribution, what can I do if I'm eligible for ROTH IRA contribution for 2020? If I'm not still eligible for 2020, I need to remove/withdraw the 2018 excess contribution and associated earnings correct? What do I need to do/file with my 2019 return to avoid 6% penalty in 2019 and onward?

Was 6% tax on the excess in 2018 already penalized and taken out once I filed 2018 Returns? Or should I be expecting a debt from IRS sometimes down the road?

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1) For 2019 correct.  For a loss the IRS says:

• You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount.

2) For the 2018 excess, you must report that on your 2018 (or amended 2018) tax return as excess an pay the 6% penalty since it was not removed by the extended 2018 due date.

You can either remove the 2018 excess (not adjusted for any gain or loss) OR if eligible for a 2019 contribution, apply it to 2019 and not remove it.   The IRA contribution  interview will give you that option.

[PandaPo]

Hi @macuser_22 ,

Follow up questions for 2018 excess:

-Since there's no adjustment for any gain or loss, do I just tell my bank to remove/withdraw the exact excess amount?

-And then do I just use Turbo Tax amend option to report the excess amount?

-How and when do I pay 6% penalty? I assume this will be 6% for the year 2018 and 2019?

-Do I need to file any extra forms when filing 2019 Return?

-Is it possible to apply 2018 excess to 2020 contribution?

-What's IRA contribution interview?

Thank you!

[macuser_22]

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@PandaPo wrote:

Hi @macuser_22 ,

Follow up questions for 2018 excess:

-Since there's no adjustment for any gain or loss, do I just tell my bank to remove/withdraw the exact excess amount?

-And then do I just use Turbo Tax amend option to report the excess amount?

-How and when do I pay 6% penalty? I assume this will be 6% for the year 2018 and 2019?

-Do I need to file any extra forms when filing 2019 Return?

-Is it possible to apply 2018 excess to 2020 contribution?

-What's IRA contribution interview?

Thank you!

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For 2018, since it is too late to avoid the 2018  penalty then you just take a regular distribution for the amount of the excess - no less and no more.   The financial institution will report that distribution on a 2020 1099-R form with a box 7 code J if yiu are under age 59 1/2 (or a code Q or T of older than age 50 1/2).  That is reported next year on your 2020 tax return.

Yes, it you are eligible for a 2019 contribution and the 2018 excess would not put you over the limit then it can be applied as a 2019 contribution which will remove the excess.  The IRA Roth contribution  interview has questions about that.

For the 2018 tax return, If you previously entered the Roth contribution in the IRA contribution interview prior to filing the 2018 tax return, then TurboTax should have told yiu that it was an excess and if not remove would have added a 5329 form with the 6% penalty. 

If you did not do that, then you would need to amend 2018 to add it now.  The 29018 5329 form line 23 and the 6% tax on line 23 should be produced.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR  Use the "Tools" menu  (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

[macuser_22]

Above post edited to add information.