Re: Excess Roth IRA contributions since inception

ETFtrader · Feb 24, 2025 1:42:18 PM

I discovered that my wife had set up a Roth IRA account in 2021 and has been making contributions for the last 4 years (2021, 2022, 2023 and 2024). Unfortunately, she failed to realize that due to the MAGI limit she did not qualify to make a Roth IRA contribution in any of those years. So the Roth IRA needs to be unwound and tax penalties paid. She's under 59 1/2 yrs old. I am using the desktop version of TurboTax and have all prior years installed on my computer. I've read through the forums and think I have the solution for our fact pattern but I have some questions. Roth IRA contributions and details: 2021 $6000 contribution 2022 $6000 contribution 2023 $6000 contribution 2024 $7000 contribution Total Contributions in Account: $25,000 Account Balance as of 12/31/2024: $32,500 (difference of $7500 is investment earnings/gains) Account Balance as of February 2025: $33,000 ($500 in investment earnings/gains since 12/31/2024) No funds have been distributed from the financial institution as of yet. So need advice on that as well as the TurboTax steps. The 1099-R's are also of concern. What I think needs to happen based on my TurboTax community research (with questions on #5 and #8): 1. Amend our 2021 tax return and report excess contribution of $6,000 on Form 5329, with penalty computed at 6% of $6,000. TurboTax will generate the 5329 and the 1040-X that I will need to file. 2. Amend our 2022 tax return and report excess contribution of $6,000 and prior year excess contribution of $6,000 thats still in the account on Form 5329 with penalty computed at 6% of $12,000. TurboTax will generate the 5329 and the 1040-X that I will need to file. 3. Amend our 2023 tax return and report excess contributions of $6,000 and prior years excess contribution of $12,000 that is still in the account on Form 5329 with penalty computed at 6% of $18,000. TurboTax will generate the 5329 and the 1040-X that I will need to file. 4. Prepare our 2024 return and report prior year's excess contributions of $18,000 on Form 5329 with penalty computed at 6% of $18,000. Also report the $7000 of excess contribution made in 2024, but that it's been reversed. I've read that we can avoid a penalty on the 2024 contribution amount of $7,000 by making a "corrective distribution" before April 15, 2025. See #7 below. 5. On the 2024 tax return report the $7,500 in Roth IRA gains/earnings on Form 5329. Those earnings will also appear on 1040 Line 4b as ordinary income. In TurboTax manually prepare a 2025 form 1099-R in expectation of that the 1099-R that the financial institution will send in early 2026 (for tax year 2025). This 1099-R will have codes P&J. When the 1099 arrives from the financial institution in 2026 we can ignore it since we have already submitted it as part of our 2024 tax return filing. Alternatively, we could wait until the financial institution issues the 1099-R in early 2026 (for tax year 2025), and then amend our 2024 tax return at that time. **Not sure if this is correct or not.** 6. Request financial institution to distribute the $18,000 in excess contributions from 2021-2023 (with no earnings or gains included), with expectation they will issue a 2025 1099-R with code J. Use this 1099-R to eliminate the excess contribution on the 2025 tax return so no penalty will be owed in 2025. 7. Request financial institution to make a "corrective distribution" of the 2024 contribution amount, including earnings as of 12/31/2024 (so $7000 contribution + $7500 earnings), with the expectation they will issue a tax year 2025 1099-R with code J (for $7000 contribution) and Code P (for the $7500 earnings/gains). 8. Request financial institution to distribute the remainder of the Roth IRA account balance (any earnings between Dec 31, 2024 and when the distribution occurs prior to April 15, 2025). This will get reported on a 2025 1099-R with a code P. This will get captured on Form 5329 and 1040 Line 4b as ordinary income when we file our 2025 tax return. **Not sure if this is correct or not.** Thanks for your assistance!