2016 & 2018 Excess Contribution - Discovered in 2019

[evanj11]

Contributing to Roth IRA since 2013, last week I discovered I was not eligible to contribute in 2016 & 2018 due to MAGI limits. Pls. let me know if I am on the right path to remedying this. Remove $13k excess Roth contributions prior to 12/31/2019 and file these tax forms: 

2016–Forms 5329/1040x & pay 6% tax $390 ($6500 excess)

2017–Forms 5329/1040x & pay 6% tax on 2016-17 $780 (no excess)

2018 -Forms 5329/1040x & pay 6% tax on 2016-17-18 $1170 ($6500 excess)

2019 - File Forms 5329/1040 & pay 6% tax on 2016-17-18-19 $1560 (no excess)

Total of 6% Excise Tax 2016-2019 = $3900, also in 2019 I will pay 10% early withdrawal penalty on 2016 ($1251) earnings (2018 was a loss -$86) using IRS formula below.

Net income=excess contribution x ACB-AOB           

                                                           AOB

*Note: Took indirect 60-day rollover distribution from Traditional IRA in June 2019, deposited full amount back into account before 60 days. Would this impact withdrawing the excess Roth IRA contributions in 2019? Should I be handling any of the above any differently than outline above, any guidance appreciated. 

[dmertz]

• 2016:  Correct, you must file 2016 Form 5329 and pay the 6%, $390 penalty on the $6,500 excess contribution for 2016
• 2017:  If you made no new excess contribution for 2017 then you would file 2017 Form 5329 and pay the 6%, $390 penalty on the $6,500 excess contribution, same as for 2016.
• 2018:  If you made another $6,500 excess contribution for 2018, bringing your total excess in your Roth IRAs to $13,000, you must file 2018 Form 5329 and pay the 6%, $780 penalty on the combined $13,000 of excess in your Roth IRAs.
• 2019:  After obtaining a regular distribution of exactly $13,000 from your Roth IRAs before the end of 2019, your 2019 tax return will include Form 5329 to show the $13,000 of regular distribution reducing your excess to zero and you'll own no penalty for 2019.  If your regular Roth IRA distribution is not a qualified distribution, your 2019 tax return must also include 2019 Form 8606 Part III to show that the taxable amount of the distribution is $0.
• The total of the penalties to be paid is $390 + $390 + $780 = $1,560.  (If you fail to obtain a distribution of the $13,000 by the end of 2019, add another $780 as the penalty for 2019.)
• Earnings remain in the Roth IRA.  Paying excess contribution penalties and the requirement to distribute earnings are mutually exclusive.

[evanj11]

Thank you for your response. So, if I am not age 59 1/2, but I have reached the 5 year limit for contributing (started in 2013), then the $13,000 excess removal is considered a non-qualified distribution and therefore subject to the 10% tax on early withdrawal and included in gross income for the year removed, is this correct? 

[dmertz]

None of the distribution of $13,000 is subject to tax or penalty because it is a distribution of your basis in Roth IRA contributions, even though those were excess contributions.  The taxable amount of $0 will be done on Form 8606 Part III.  The early-distribution penalty is 10% of the taxable amount of $0 = $0.