excess Roth IRA contributions

[gjgogol]

@DanaB27  OK the steps weren't exactly what you described but I think I am where I am supposed to be. 

1. so to confirm, when it asks me if I contributed to a Roth IRA in 2022, I should say NO because I withdrew my 2022 excess contribution (made on Jan 14, 2022) on March 31. 2023, correct?

2. It also asks me for my traditional IRAs, which I have some but did not contribute to it in the last 20 years. should I identify that money as well so TT can track it? Or will it confuse me and TT?

3. At this point, does it matter if my contributions made 20 years ago were deductible vs. nondeductible? For those contributions made 20 years ago, I do not remember if they were deductible or not.

4. I also clicked on "learn more" link on one of the TT pages and it took me to an "on demand tax guidance" text box that stated the following...

If the excess contribution is not withdrawn by the date your tax return is due (including extensions), you will be subject to a 6% tax on the excess. This is calculated on Form 5329.

This penalty is cumulative and carries over each year until you correct it. If you withdraw the excess on or before the date your tax return is due, you pay no penalty as long as you took no deduction for the excess amount on your return.

Make sure you also withdraw the interest that's been earned on that excess amount as well. You must report any interest earned on the tax return for the year that the excess contribution was made. Unfortunately this interest may also be subject to the tax on early distributions.

Please note the sentences where it states, "This penalty is cumulative and carries over each year until you correct it. If you withdraw the excess on or before the date your tax return is due, you pay no penalty as long as you took no deduction for the excess amount on your return."...since it seems to tie the no penalty part to the cumulative penalty statement, doesn't this imply that for 2022 I do not owe a penalty on the excess 2021 excess contribution if I withdrew the 2021 excess money by April 18, 2023? 

[DanaB27]

1. Yes, you will say no to the Roth IRA contribution for 2022 because you removed it.

2. No, you don't enter anything for the traditional IRA unless you made a direct traditional IRA contribution for 2022.

3. Yes, you should check your records for your last filed Form 8606 if you made nondeductible contributions in the past but you don't need to enter that in the 2022 tax return unless you make a nondeductible traditional IRA contribution for 2022, take a distribution from the traditional IRA, or make a conversion.

No, on your 2022 tax return, you will have to pay the 6% penalty for the 2021 excess contribution because you missed the deadline to avoid the 6% penalty (the extended due date of the 2021 tax return). You will have to pay the 6% penalty on your 2021 and 2022 tax returns because the excess remained in the account and wasn't removed until 2023.

@gjgogol 

[fanfare]

withdrawal of excess contribution:

before tax due date including extensions: positive earnings allocable to the excess are taxable on the Line 4b for the year of the contribution. negative earnings are ignored; therefore, do report the entire requested amount as returned .

positive earnings removed are penalized 10% if you are under age 59 1/2.

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,

(or offset it with currently allowed contribution) .

earnings stay in the Roth account.

This should answer all your questions.

It's not as complicated as you seem to be making it.

@gjgogol 

[gjgogol]

@fanfare You stated, "after tax due date including extensions: you distribute the excess amount being carried forward on 5329, (or offset it with currently allowed contribution) . earnings stay in the Roth account."

So I took distribution of my 2021 excess roth IRA contribution on March 31, 2023.  I believe my custodian withdrew the entire amount, i.e. both contribution and earnings.  I am over 59 1/2.  I had a 20+ year old roth IRA account with a different custodian.  TT created a Schedule 2 with $840 (for both me and my spouse) and two Forms 5329 for each of us with $420 each.  Will we be taxed on the earnings and if so when?

[fanfare]

after the due date, including extension, the earnings are not to be removed.

If you filed for a request of removal of 2021 excess plus earnings in 2023, that was incorrect.

It was also incorrect for the custodian to do that for you and should have contacted you for a corrected form.

"Will we be taxed on the earnings and if so when?"

IRS says:

How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made."

That would be your 2021 tax return.

--

"I believe my custodian withdrew  ... contribution and earnings "

the earnings are easily obtainable by subtracting the excess that you asked to be removed, from the amount the custodian gave you.

for each year you left the excess in through year-end,  there is a 6% penalty on the excess, not the earnings.

@gjgogol 

[gjgogol]

@fanfare Why do I make sure that the 2021 excess is withdrawn as a regular distribution without any earnings and ensure that the 2022 excess is withdrawn as a regular distribution with earnings?

[fanfare]

It is still before the due date of your 2022 return, including extensions.

For 2022, do that to avoid any penalty on an excess contribution,

For 2021, it is too late to avoid the penalty.

Those are the rules.

Refer to IRS Pub 590A.

@gjgogol 

[gjgogol]

@fanfare And for my 2022 return, when TT asks for the values of my Roth IRAs on December 31, 2022, I should take my custodians' December 31, 2022 statements and subtract all the distribution amounts I made on March 31, 2023 for tax years 2021 and 2022, correct (since those statement do not reflect any distributions)?

[fanfare]

If turbotax wanted the value of your Roths now, it would ask for that.

Answer the question. don't embellish.

@gjgogol 

[gjgogol]

It turns out that I incurred a loss for my 2022 excess contribution (Jan 2022). My custodian informed me that they distributed $5.9K (Mar 2023) instead of the $7K I contributed.  How will the loss be handled tax wise?

[fanfare]

see my answer above that "answers all your questions"

@gjgogol 

[gjgogol]

@DanaB27 REgarding my amended 2021 tax return, you mentioned that if a form did not change, I do not need to submit/file/include it with my amendment. Do you know why TT includes all those other forms for filing when they didn't change?

[DanaB27]

Yes, generally you will only send the Forms/Schedules that changed and TurboTax should have only printed those.

[fanfare]

@DanaB27 

to attach new or changed forms to 1040-X

If you are using TurboTax you have to do this by visual comparison. The program will not break out those pages for you.

[gjgogol]

Hello - So to continue my saga regarding excess contributions to ROTH IRA, My wife and I have now received a 2023 Form 1099R reporting gross distributions...one with distribution code P and a separate 2023 Form 1099R with distribution code Q. I have already paid the penalty fee as well as interest owed. Now what? 

- Are these distributions taxable? 

- Will TT handle them appropriately?

Thank you for any insight you can provide to me.