Complicated case: excess contribution to ROTH IRA for 2 years

[Nikkinmarie]

I just found out that I have excess contribution to ROTH IRA for tax year 2020 and 2021. 

In 2020, I made $200 to Traditional IRA and $6000 to ROTH IRA, I have $200 excess on 2020 Roth IRA. 

In 2021, I made $6000 to Traditional IRA and $6000 to ROTH IRA, I have $6000 excess on 2021 Roth IRA.

I requested to my financial institution to withdraw $6,200 excess for tax year 2020 and 2021, however, he told me I only need to withdraw $4680 due to investment loss. 

From my understanding, I will need to withdraw the excess contribution of $6,200 because my ROTH account balance is not zero, if I only withdrew $4680, the remaining excess $1420 will still be counted 6% penalty every year, am I right?

[LudwigVan_fan]

I believe you are correct.  That the loss in the ROTH doesn't make up for the excess contributions.

Here is a link to IRS IRA information.  At the bottom of the page are links for further information.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-li...

[Opus 17]

No, that's not quite right.

Most important is:

1. Did you file your tax return for 2021 yet?  (Even if you now realize it needs to be corrected.)
2. If you did not file, did you request the automatic deadline extension before midnight on April 18?
3. Did you complete the withdrawal of excess yet?
4. Is this your entire Roth IRA balance or do you have other funds in the account?

I will assume one set of facts, if the facts are different, the answer might be different so be sure to let us know.

First, you have a $200 excess for 2020 that can't be removed as an excess.  You need to report that excess on your 2020 return (amended if necessary) and pay the 6% tax on form 5329.  If you did not report the excess on your original 2020 tax return and this is the only change, you don't need to file an entire amended tax return.  You can download and print form 5329 for 2020, fill it out, check the box for "amended return" and mail it to the IRS with a check. 

https://www.irs.gov/pub/irs-prior/f5329--2020.pdf

For 2021, I will assume you did not file yet, and you completed the removal of $4680 before April 18. 

In that case you report that you made an excess contribution of $1140.  (You would not report a contribution of $6000 and withdrawal of $4680, because the removal of excess is not technically a withdrawal and it cancels the contribution as if you never made it.  So you have a contribution of $1140.  This will add to the $200 prior excess for a total excess contribution of $1340 and another 6% penalty.

Then going forward, you can use up the excess by contribution less than your allowable maximum to an IRA or Roth IRA.  In other words, if you are eligible to make IRA or Roth IRA contributions in 2022 (based on your income and other situations) then you should only contribute a total of $6000-$1340 = $4660  (into any combination of regular and Roth IRA).  This will allow you to treat the prior excess as a legal 2022 contribution, and will remove the penalty going forward.

If you do continue to make $6000 maximum contributions, you can zero out the penalty by withdrawing $1340 from your Roth IRA in 2022, which may or may not be taxable depending on whether that $1340 represents contributions or earnings. 

If you continue to make maximum $6000 contributions, AND you don't take a corrective withdrawal, only then will you pay the 6% penalty in perpetuity. 

[Nikkinmarie]

Thanks all for your replies.

Sorry that I should make it clear.

I already filed my tax on 3/20/2022 for 2021 taxes.

I guess I will need to report the excess contribution of $200 and amend my 2020 return to pay 6% penalty for this excess because I did not withdraw $200 before 10/15/2021. 

I am just confused about the excess contribution of $6000 to Roth IRA in 2021, the excess withdrawal is not complete yet because the financial institution is still calculating it. I have filled out the form requesting to withdraw $200 for tax year 2020 and $6000 for tax year 2021, but he just replied me that the withdrawal is $4680 due to investment loss. therefore, I don't know what I should do.

Based on what you said, it seems that I have to instruct them to withdraw $200 for 2020 and $6000 for 2021 because if I only withdrew $4,680, the difference of $1,520 ($6,200-$4,680) will still be considered as excess contribution. 

As long as the withdrawal is completed by 10/15/2022 for 2020 and 2021 excess contribution, I don't need to pay 6% penalty for those 2020 and 2021 excess contribution.

Please feel free to correct me if I am not right, thanks! 

[Opus 17]

@Nikkinmarie 

"I guess I will need to report the excess contribution of $200 and amend my 2020 return to pay 6% penalty for this excess because I did not withdraw $200 before 10/15/2021. "

Correct.  You don't have to file a full amended return, you can just prepare a form 5329 for 2020 and check the "amended" box.

"Based on what you said, it seems that I have to instruct them to withdraw $200 for 2020 and $6000 for 2021 because if I only withdrew $4,680, the difference of $1,520 ($6,200-$4,680) will still be considered as excess contribution."

Not quite.  The $200 is a separate problem.  That can't be removed as excess.  If you remove it to avoid a future penalty, that removal will count as occurring in 2022.  

You need to instruct the custodian to return $6000 to you as a withdrawal of excess contribution from 2021, as long as you have sufficient funds in the Roth IRA.  You must complete this withdrawal before 10/17/22.  Then, you must file an amended tax return for 2021 that reports the $200 prior contribution from 2021 as a continuing excess, but you won't report any contribution or excess for 2021.  You will pay another $12 penalty (6% of $200).  You must file your amended return by mail, not online, and you must write "Filed pursuant to section 301.9100-2" on the top of page 1. 

(Note that if you prefer, you could remove the excess from the traditional IRA, but then you would lose the tax deduction and pay more income tax on your amended return.  But sometimes there might be reasons to leave the money in the Roth instead of leaving it in the traditional IRA.) 

Then as for the remaining $200 excess in the account, you can deal with this in one of two ways.

1. Take a regular Roth IRA withdrawal of $200 some time in 2022, that will be reported as a 2022 withdrawal on your 2022 tax return.  (It is too late to take a corrective withdrawal of this $200 in 2022 and count it retroactive to 2021.)  Taking a regular withdrawal will remove it from being considered excess when you file your 2022 return.  

2.  Or, if you are eligible to make new contributions to a traditional or Roth IRA for 2022, contribute $200 less than your maximum allowed contribution.  The $200 excess will be counted as part of your allowed limit for 2022 and will no longer count as excess. 

[Nikkinmarie]

Thanks so much for your detailed explanation.

I filed a joint return and my spouse has excess contribution too.

He has excess contribution of $6000 for 2020 and $6000 for 2021 Roth IRA.

I instructed my custodian to withdraw $12000  ($6000 for tax year 2020 and tax year 2021). I am still waiting for the custodian’s response. After reading your reply, I know the withdrawal year is 2022, that’s why I still need to pay 6% for the excess contribution for tax year 2020 on 2021 return. 

But another questions is as far as I know, his Roth has a loss and the account balance is around $11000.

For his case, the maximum withdrew in 2022 is $11000 due to investment loss. What should I do his excess contribution then since this is a negative account balance. I still owe the difference of $1000 ($12000-$11000) for the excess contribution.

Thanks so much for your help answering my questions. 

[Opus 17]

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@Nikkinmarie wrote:

Thanks so much for your detailed explanation.

I filed a joint return and my spouse has excess contribution too.

He has excess contribution of $6000 for 2020 and $6000 for 2021 Roth IRA.

I instructed my custodian to withdraw $12000  ($6000 for tax year 2020 and tax year 2021). I am still waiting for the custodian’s response. After reading your reply, I know the withdrawal year is 2022, that’s why I still need to pay 6% for the excess contribution for tax year 2020 on 2021 return. 

But another questions is as far as I know, his Roth has a loss and the account balance is around $11000.

For his case, the maximum withdrew in 2022 is $11000 due to investment loss. What should I do his excess contribution then since this is a negative account balance. I still owe the difference of $1000 ($12000-$11000) for the excess contribution.

Thanks so much for your help answering my questions. 

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Once again, you are confusing 2020 and 2021.  The only thing you can remove from your spouse's account using the "removal of excess contributions" is the amount for 2021 ($6000) which must be removed by October 17, 2022.  The other $6000 from 2020 can't be a "removal of excess contribution" because you are past the deadline.

You should cancel the request to withdraw $12,000 and resubmit a requests to withdraw the $6000 excess contribution from 2021 only.

For 2020, you again need to file an amended return for your spouse to report the $6000 excess and pay the penalty.  And again, this can be done with a stand alone form 5329 in your spouses name.  Or, file an amended joint return that reports both excess contributions (it will have 2 different form 5329s, one in each spouses name.)

For 2021, if you complete the removal of excess $6000 from the 2021 contribution, your spouse will still have a $6000 excess on their form 5329 from 2020, even though the account balance will be less than $6000.  The amended joint return needs to be filed by mail with the notation I indicated. 

For 2022, you can clear the remaining excess by not making any new contributions to any traditional or Roth IRA, and allowing the $6000 excess from 2020 to be treated as your spouse's 2022 contribution.

[Nikkinmarie]

"Then as for the remaining $200 excess in the account, you can deal with this in one of two ways.

1. Take a regular Roth IRA withdrawal of $200 some time in 2022, that will be reported as a 2022 withdrawal on your 2022 tax return.  (It is too late to take a corrective withdrawal of this $200 in 2022 and count it retroactive to 2021.)  Taking a regular withdrawal will remove it from being considered excess when you file your 2022 return.  

2.  Or, if you are eligible to make new contributions to a traditional or Roth IRA for 2022, contribute $200 less than your maximum allowed contribution.  The $200 excess will be counted as part of your allowed limit for 2022 and will no longer count as excess. "

Yes, I am quite confused of 2020 excess. I thought I can do regular withdrawal of my $200 and my spouse's $6000 now (2022) to remove excess on my 2022 tax return based on option 1.  After reading your last post, you are advising option 2.

[macuser_22]

For the 2000 $200, it s too late to get a return of contribution (as said above) and you will owe a 6% penalty on a  2020 5329 form on an amended 2020 tax return.

The $6,000 2021 excess (or what is left of it if there was a loss attributed to the $6,000) can be returned as a "return of contribution".     If less than $6,000 because of the loss you simply get less money back - you do not make up for the loss with other funds. 

And you do not "withdraw" it yourself, you ask of a "return of contribution" and if done in 2022,  the financial institution will issue a 2022 1099-R with a code P or PJ if a Roth for you to enter in your 2022 tax return.

Had there been a gain instead, you would receive back more then the contribution and the gain would be taxable income.

[Opus 17]

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@Nikkinmarie wrote:

"Then as for the remaining $200 excess in the account, you can deal with this in one of two ways.

1. Take a regular Roth IRA withdrawal of $200 some time in 2022, that will be reported as a 2022 withdrawal on your 2022 tax return.  (It is too late to take a corrective withdrawal of this $200 in 2022 and count it retroactive to 2021.)  Taking a regular withdrawal will remove it from being considered excess when you file your 2022 return.  

2.  Or, if you are eligible to make new contributions to a traditional or Roth IRA for 2022, contribute $200 less than your maximum allowed contribution.  The $200 excess will be counted as part of your allowed limit for 2022 and will no longer count as excess. "

Yes, I am quite confused of 2020 excess. I thought I can do regular withdrawal of my $200 and my spouse's $6000 now (2022) to remove excess on my 2022 tax return based on option 1.  After reading your last post, you are advising option 2.

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Yes, you can remove the $200 (your excess from 2020) and the $6000 (spouse's excess from 2020) as a regular 2022 withdrawal.  You will get each get a 1099-R for the withdrawal, report it on your tax return, and it will probably be non-taxable as long as the withdrawal represents a withdrawal of original contribution.

I recommend option #2 simply because leaving money inside a tax-preferred retirement account is better for your long-term financial situation.  If you are eligible in 2022 to make IRA or Roth IRA contributions (based on your income, filings status, and retirement plan coverage at work, if any) why not leave the money in the account to grow for retirement and consider it as going toward your 2022 contribution limit?

But either option is ok.