How to Navigate Excess Roth IRA Contributions due to Salary Limit

[jch825]

Hi there, I'd like some help on dealing with excess roth IRA contributions.

Situation:

In 2020 I contributed $5000 to my Roth IRA. Due to a switch in jobs, I ended up going over the salary for allowable Roth IRA contributions in 2020.

I placed the $5000 into various stocks which gained $2095.20, for a total of $7095.20. Upon realization that I was over the salary limit, I withdrew my contribution of $5000 and sold enough stock to make up the $2095.20 of gains. I withdrew all $7095.20. This was done around October 2021. I received a 2021 1099-R from my Roth IRA custodian.

As I understand it there are number of penalties and other taxes to pay, could you please let me know if this is correct:

1. Amend 2020 tax return to pay 6% tax on excess contribution ($5000).

2. Report 2021 1099-R on my 2021 tax return, and pay income taxes as well as <59.5 years old penalty on $2095.20 earnings.

3. Assuming I got all of that correct, do I need to submit a amended 2020 tax return prior to reporting the 2021 1099-R on my 2021 tax return? My concern is I won't be able to submit the amended 2020 tax return until after Tax Day (Apr 18). 

Thanks,

Jeremy

[macuser_22]

Did you ask the IRA custodian for a "return of contribution" and receive a 1099-R form?   What code is in box 7?

[jch825]

Hey @macuser_22, thanks for replying, yes I did ask the custodian and received a 2021 1099-R form. The code in box 7 is 'PJ'.

[macuser_22]

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@jch825 wrote:

Hey @macuser_22, thanks for replying, yes I did ask the custodian and received a 2021 1099-R form. The code in box 7 is 'PJ'.

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Then you must amend 2020 to add the 1099-R since any amount inbox 2a is taxable in 2020.

[jch825]

Thanks @macuser_22, does that mean this entire issue can be settled in my 2020 tax return amendment? By that I mean paying 1) over-contribution penalty, 2) income tax on earnings, and 3) <59.5yr old withdrawal penalty on earnings.

[macuser_22]

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@jch825 wrote:

Thanks @macuser_22, does that mean this entire issue can be settled in my 2020 tax return amendment? By that I mean paying 1) over-contribution penalty, 2) income tax on earnings, and 3) <59.5yr old withdrawal penalty on earnings.

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Yes.  But there is no penalty since it was timely removed.  Only the excess is taxable.   If under age 59 1/2 then there is an additional 10% tax on the excess.

[jch825]

Thanks @macuser_22. One thing I’m confused about is that my contribution excess was during 2020. I withdrew the excess and earnings in late 2021. Wouldn’t  that mean that I would have to be penalized 6% since I did not withdraw the excess and earnings in 2020?

[macuser_22]

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@jch825 wrote:

Thanks @macuser_22. One thing I’m confused about is that my contribution excess was during 2020. I withdrew the excess and earnings in late 2021. Wouldn’t  that mean that I would have to be penalized 6% since I did not withdraw the excess and earnings in 2020?

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No.   Code PJ means that the excess was timely removed so there is no 6% penalty.  If not timely removed and subject to the 6%  the code would just be J.