Excessive/Ineligible Contribution to Roth IRA Many Years Ago

[acejeffery]

I just realized that I wasn't eligible to contribute to a Roth IRA for the tax year of 2019 as I was in school and earned no income. However, I contributed $898.70 to my Roth IRA for that tax year as I didn't know the rules at that time. As it is now 2024, how should I deal with this situation?

Thanks.

[DanaB27]

You will have to pay the 6% penalty for 2019, 2020, 2021, 2022, and 2023 unless you are able to apply the excess as a Roth IRA contribution in one of those years. For example, were you allowed to make Roth IRA contributions in 2020 and did not already contribute the full amount? If yes, then this would fix the excess contribution if not then you will have to pay the 6% penalty for 2020, 2021, 2022, and 2023.

If you were not able to apply the excess contribution to one of those years then you will have to request a regular distribution of $898.70 (no earnings or losses) to remove the excess contribution for 2024. The 2024 Form 1099-R will be entered on your 2024 tax return next year and remove the excess from your return.

You will have to amend your 2019 return to fill out Form 5329  Part IV to calculate the 6% penalty. 

On your 2020 amended Tax return follow these steps to calculate the 6% penalty or apply the excess to 2020 if allowed:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution s from line 24 of your 2019 Form 5329
6. On the "How Much Excess to 2020?" screen enter how much you want to apply to 2020.

If you are able to apply the excess to 2020 then you are done, if not then TurboTax will calculate the 6% penalty and you will have to amend your 2021 return and repeat the steps. If you cannot apply the excess to 2021 then TurboTax will calculate the 6% penalty and you will have to amend your 2022 return. Please see How do I amend my federal tax return for a prior year?

If you cannot apply the excess in 2022 then you will have to enter the excess contribution in your 2023 return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the excess contribution from line 24 of your 2022 Form 5329
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023.

[acejeffery]

Hello,

Thank you so much for the detailed response to my question. I contacted the brokage company of my Roth IRA, and was told that their system doesn't support applying the excess amount of contribution from a previous year to a later year, although allowed by IRS.

As I already contributed the full Roth IRA amount to 2020, 2021, 2022, and 2023, I wonder if there is anyway for me to applying this excessive amount from 2019 to 2024 tax year? As we are still ahead of the 4/15/2024 deadline for the 2023 tax year, is it possible for me to withdraw $898.70 from 2023, and apply the same amount from 2019 to 2023, instead of 2024? If so, do I need to consider any earnings or losses for the withdraw/distribution?

Thanks!

[acejeffery]

Also, do I still need to pay the 6% penalty if I am able to apply the excessive contribution from 2019 to 2023 or 2024? If so, do I need to pay the 6% penalty each year?

Thanks.

[Opus 17]

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@acejeffery wrote:

Hello,

Thank you so much for the detailed response to my question. I contacted the brokage company of my Roth IRA, and was told that their system doesn't support applying the excess amount of contribution from a previous year to a later year, although allowed by IRS.

As I already contributed the full Roth IRA amount to 2020, 2021, 2022, and 2023, I wonder if there is anyway for me to applying this excessive amount from 2019 to 2024 tax year? As we are still ahead of the 4/15/2024 deadline for the 2023 tax year, is it possible for me to withdraw $898.70 from 2023, and apply the same amount from 2019 to 2023, instead of 2024? If so, do I need to consider any earnings or losses for the withdraw/distribution?

Thanks!

---

The overall situation is a bit odd since 2019 is past the statute of limitations, but on the other hand, this creates an ongoing problem where every subsequent return is also incorrect which extends the statute of limitations indefinitely.  The straight-up by the book solution is to file amended returns for 2019, 2020, 2021 and 2022 that reports the excess and pays the 6% penalty.  The IRS will likely send you additional bills for interest back-dated to the original filing deadlines (June 15, 2020 for the 2019 season, and so on).  About 1/2% per month.

You are correct that for 2023, if you remove $899 before April 15, 2024 as a "return of excess contribution", then the 2019 excess will be "used up" and you will have no further penalties (Round up so you don't run into problems with the cents).  However, when you remove the $899 of excess contributions, the trustee must also pay you the earnings attributable during 2023 on that $899 of excess contribution.  Even though these earnings are going to be paid in calendar year 2024, they are taxable on your 2023 return.  (The withdrawal of excess contribution is not taxable, the earnings are subject to income tax but not a 10% penalty.)  To report the withdrawal of excess plus earnings on your 2023 return, follow these instructions.

To create a Form 1099-R in your 2023 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 2023?"
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 P and J
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.

[Wallaby]

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[RobertB4444]

Please take all of this information to a tax professional.  These are closed years that you are reopening here and the IRS should be dealt with carefully.  There are plenty of US tax professionals who will help you remotely.  You should not be re-opening these years without professional advice.

@Wallaby 

[Wallaby]

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[Wallaby]

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