excess Roth IRA contributions for multiple years.

[ktax1]

Hi, I'm dealing with a nearly identical tax situation and I have a few questions:

1) If an excess Roth contribution for tax year 2020 was made in 2021 (i.e. money was deposited in early 2021 but marked as a prior year 2020  contribution), does the 2020 tax return still need to be amended? This money was not in the Roth IRA at any point in 2020 so it had no potential for earning during that year.

2) Does the order of filing amended returns matter? If the 2020 and 2021 excess contributions withdrawals have no NIA calculated and are identical to the amount contributed (e.g. you put in $6000 in 2020 and took out an excess of exactly $6000 in 2023), can the 2020 and 2021 amended returns be filed after the 2022 return? 

3) Is there a penalty for not filing all the amended 2020 and 2021 returns by the 2023 filing deadline?

Thanks!

[DanaB27]

1) If you made an excess contribution for 2020 and did not remove it by the due date of the extended 2020 tax return then you will have to pay the 6% penalty on your 2020 tax return. If you removed the excess plus earnings in 2021 before the due date then you should have gotten a 2021 Form 1099-R with codes P and J, and this belongs on your 2020 tax return. Only the earnings will be taxable in 2020 and subject to the 10% penalty. 

2) Generally, you don't have to wait to file your 2022 return if you need to amend a prior year's return but I want to make sure I understand your situation fully.

To clarify, did you always remove the excess before the due date of the return and request the withdrawal of excess contributions plus the earnings? Or did you request a regular distribution after the extended due date and therefore didn't need to remove the earnings? When did you receive the distribution?

If you didn't have any earnings because you had losses then you wouldn't need to amend the returns for the received Form 1099-R (with codes P and J and box 2a $0) since you have no taxable event. All that TurboTax would do is add an explanation statement.

3)No.

@ktax1 

[ktax1]

@DanaB27 The exact situation is this:

Age is over 59 1/2 and the Roth IRA was opened back in 2007.

In 2021, incorrectly contributed the max allowed for 2020.

In 2021, incorrectly contributed the max allowed for 2021.

In 2022, incorrectly contributed the max allowed for 2022.

In 2023, incorrectly contributed the max allowed for 2023.

In March 2023, the broker removed all the excess contributions in 4 separate transactions. For years 2020 and 2021, they took the exact amount out that went in ($7K went in, $7K came out). For 2022 and 2023, they did calculate earnings and took out more than the original contributions, so there are earnings to report for those years.

The broker indicates that the 1099-R forms will be coming at the end of the year. No taxes were withheld.

At this point the goal is to figure out how and when to file the 2020, 2021, and 2022 returns, and whether to file an amended 2022 return next year when the 1099s are in hand, or guess at the 1099-R codes now. If we wait for the 1099-Rs, would all 4 of them be reported on the 2022 return, i.e. in 2024 is that the only return that would need to be amended once 1099-Rs are available?

[DanaB27]

You should get a 2023 Form 1099-R with code T or Q for the regular distribution of the 2020 and 2021 excess contributions. This will be entered next year on your 2023 tax return and is not taxable.

You should get a 2023 Form 1099-R with codes 8 and J for the 2023 excess contribution. This will be entered next year on your 2023 tax return. Only the earnings will be taxable. Enter the Form 1099-R and in the follow-up questions enter the amount from box 2a under "Another reason" on the "Did you use your IRA to pay for any of these expenses?" screen since you are over 59 ½ to get the exemption from the 10% early withdrawal penalty. 

You should get a 2023 Form 1099-R with P and J for the 2022 excess contribution. This must be entered on your 2022 tax return. Only the earnings will be taxable. You have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" since you are over 59 1/2 

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

@ktax1

[ktax1]

Thanks so much @DanaB27 for your help!

On the 2022 return, just to make sure I am following correctly, this is what I think should happen for the above scenario (max excess contributions for 2020, 2021, 2022, 2023, all now removed):

1. Jump to "IRA Contribution section"

2. Select "Roth IRA"

3. On the "Enter Your Roth IRA Contributions" screen, enter $7000 (this covers 2022)

4. Click through and answer questions ...

5. On the "Enter Excess Contributions" screen, enter $14000 (this covers 2020 and 2021)

6. On the "How Much Excess to 2022" screen, enter $0 (not trying to contribute anymore!)

7. On the "Tell us the Value of your Roth IRA" screen, enter the 12/31/22 account value.

8. On the "Contributions Withdrawn Before the Due Date" screen, enter $7000 (this is ONLY the 2022 excess, even though the others were also withdrawn before April 18, 2023)

Does this seem correct? TurboTax computes a penalty of $840 with these numbers, which matches my expectations (2020 $7K + 2021 $7K) * 6% = $840.

Thanks!

[DanaB27]

Yes, that is correct.

@ktax1 

[ktax1]

@DanaB27 Thanks again for all the help!

For the prior year amended returns, there is an "Explanation of Changes" description that must be added. Can the wording simply be something like "Reporting excess contribution to Roth IRA for tax year XXXX", or does the IRS want very specific wording here? Thanks.

[MaryK4]

Your description is good.  @ktax1 

[DiverJudge]

I am 64 and my wife is 65. We both made $7000 Roth IRA contributions for 2022 but our MAGI is over the limit to be eligible to make those contributions.

I planned to move the $7000 contributions + the Net Income Attributable to our traditional IRAs.

My question is does it have to go to a traditional IRA? Could we simply withdraw the contributions and any NIA?

We also each made $7000 contributions for 2020 and 2021 which we will have to withdraw and pay penalties on.

[DanaB27]

If you have enough taxable compensation (earned income) to make an IRA contribution then you can decide if you want to recharacterize the Roth IRA contribution as a traditional IRA contribution or if you want to request the withdrawal of the excess contribution plus earnings. If you make the withdrawal then the earnings will be taxable on your 2022 tax return.

To enter a recharacterization you will enter the contribution to the Roth IRA for 2022 on your 2022 tax return: 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

If you withdraw the excess contribution plus earnings then you will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022

@DiverJudge 

[DiverJudge]

It is well past April 15, hopefully, some of the experts are still looking at this community.

To summarize, I am 64 and my wife is 65. We both made excess Roth IRA contributions of $7000 in 2020 and 2021. We did not realize that our MAGI was over the limit until March of 2023. In April we withdrew the combined contributions of $28,000.

I have prepared amended returns for 2020 and 2021. For the return for 2020, we will be paying $840, and for the return for 2021, we will be paying $1680.

Does that sound correct so far? Also when sending in the amended returns for 2020 and 2021 do I need to include Schedule 1, Schedule C, Schedule SE, and Form 8995 since the numbers on these forms are not affected by the excess IRA contributions?

As for my 2022 return what additional forms should that return include? We also made excess Roth contributions for 2022 but we withdrew the contributions (less the loss attributable to those contributions) in April 2023.

Since my wife just retired our MAGI for 2023 will allow for our Roth contributions!

Thanks for all your help.

@DanaB27 

[dmertz]

For each year 2020 and 2021, all you have to do is file 2 Forms 5329 showing the excess contribution and Form 1040-X showing the additional tax that you mentioned, no other changes and provide explanation that you are paying the penalties for these excess contributions.  Your 2022 tax return (which I assume you have not yet filed) will show any taxable gain required to be distributed with the returned contributions made for 2022 and a Form 5329 for each of you showing each individual's $14,000 of excess contributions carried in from 2021 along with the $840 penalty for each of you.

The 2023 Forms 5329 that you will file next year file will show the distributions of $14,000 for each of you, entered via the Forms 1099-R that you will each receive for these distributions, reducing the excess carried into 2023 from 2022 to zero, eliminating the excess contribution penalty for 2023 and beyond.

[DiverJudge]

Thanks for the prompt response.

For 2020 we owe $840 and for 2021 we owe $1680.

Actually, 2022 has been filed already. We withdrew $21,000 each (2020, 2021, and 2022) before April 18 deadline but it is not reflected on the 2022 return. The amended return will show 2 contributions of $7000 and also 2 withdrawals of $7000. The actual amount of the withdrawals is less than $7000 since it includes the attributable loss for the 2022 contribution.

So you are saying I will show the withdrawals for 2020 and 2021 on my 2023 return? Or do I include them on my amended 2022 return?

@DanaB27@dmertz 

[dmertz]

You'll need to amend your 2020 and 2021 tax returns is only to show and pay the excess contribution penalties.  If your already filed 2022 tax return did not include Forms 5329 showing the excess contribution penalties for the $14,000 each in excess contributions carried in from 2022, you'll need to amend that too.  Nothing about the 2023 distributions goes on these amendments.

The $14,000 distributed to each of you goes on your 2023 tax return.  Although reportable, this is a nontaxable distribution of contribution basis.  If the Roth IRAs are qualified, this will go only on 2023 Forms 5329 to be subtracted from the excesses carried in from 2022.  If the Roth IRAs are not qualified, your 2023 tax return will also include Forms 8606 to determine that the taxable amount is zero by subtracting contribution basis of $14,000 each.

The return of contribution is reported by only by the explanation statement to be included filed with the amendment of your 2022 tax return, describing how the return of each 2022 $7,000 contribution was accomplished by the distribution of the loss-adjusted amounts.  This is nontaxable since there was an attributable loss rather than a taxable gain.

[DiverJudge]

Thanks for all your help on this snafu. This board is proving much more knowledgeable about how to deal with this than either our financial planner or the CPA we went to for help.

One more question before I let this subject be for a while.

I am 64, and for 2022 I had a "Net Income Attributable" of -$737.25 on my excess Roth contribution meaning I should remove $6252.75 by April 18, from my Roth Account to avoid a penalty for 2022.

My wife is 65, and for 2022 she had a "Net Income Attributable" of -$992.01 on her excess Roth contribution meaning she should remove $6252.75 by April 18, from her Roth Account to avoid a penalty for 2022.

By mistake, our financial advisor removed $6428.16 from my account ($165.41 more than necessary), and they removed $6247.09 ($239.10 more than necessary).

How do we deal with this situation?