ROTH IRA Excess Contribution: Reporting After Due Date

[IRStress]

I contributed 6,000 to my 2019 Roth IRA which created an excess contribution of $114. I made that contribution on April 2020 after I filed my 2019 taxes. I understand that I don’t have to report Roth IRA contributions. However, I must pay the 6% penalty fee on the excess amount for each year the money remained in the account. I removed the excess on January 2021, so 2 years of fees are due now. 

• Can I report it on my 2020 tax return with the form 5329 OR do I have to amend my 2019 tax return? Either way, how do I do it on TT?

Also, I took out the excess contribution, without earnings, as a normal “Roth IRA distribution” instead of a “return of contribution” because they would’ve taken the earnings out too, which I didn’t need to in this case. 

• Is this OK? Does it make a difference?

Please Help 🙂

@tagteam @DawnC @ColeenD3 @AmyC @DaveF1006

[dmertz · Accepted solution]

You own an $11 penalty with a 2019 Form 5329 Part IV which you can file stand-alone and an $11 penalty with a 2020 Form 5329 Part IV included with your 2020 tax return.

For your 2019 Form 5329, your could either just prepare it using the IRS downloadable forms or your could use 2019 TurboTax to create an amendment to your tax return that you prepared using 2019 TurboTax, enter the actual Roth IRA contribution and let TurboTax prepare 2019 Form 5329.

In 2020 TurboTax, proceed through the Roth IRA contribution section and, when asked if you made any excess contributions for prior years that you carried into 2020, answer Yes and enter the $114.  TurboTax will then prepare 2020 Form 5320 to include with your 2020 tax return.

It's correct that you obtained a regular distribution of $114 with no adjustment for investment gain or loss.  The deadline for doing a return of contribution before the due date of your 2019 tax return was October 15, 2020, so that was not possible in January 2021.  Your 2021 tax return will include Form 5329 Part IV to show that the $114 distribution has removed the excess for 2021.  Your 2021 tax return will also include Form 8606 Part III to show that this regular distribution is a nontaxable distribution of contribution basis in your Roth IRAs.

[IRStress]

Thank you very much for your detailed clarification. This helped me understand how to properly handle this issue and I have taken care of it. Best of luck to you friend 🙌 @dmertz 

[deleunig]

I have a similar issue although my excess investment was $1200.00.  I am pretty sure that equates to a $72.00 penalty.  I have not yet pulled the money from the Roth Account and when I do can I then reinvest it in a Traditional account?  If I do what are the implications of that ?  Will it just be something That I need to report in 2021 return?

[dmertz]

If you made a contribution to a Roth IRA for 2020 and that contribution includes an excess contribution because your MAGI is over the limit for your filing status, you can either as the IRA custodian to recharacterize the contribution to be a traditional IRA contribution instead, making it as if that contribution had originally been made to the traditional IRA and had the attributable investment gain or loss occur in the traditional IRA, or you can request the the IRA custodian make a return of contribution, not a regular distribution, before the due date of your 2020 tax return, including extensions.  If you obtain a return of contribution, it will be as if the contributions was never made and you could make a separate contribution to a traditional IRA.  The traditional IRA contribution resulting from a recharacterization or a new contribution after a return of the Roth IRA contribution may or may not be deductible.  If you obtain a return of contribution before the due date of your tax return, any investment gains required to be included in the distribution will be taxable and subject to an early-distribution penalty.

If the excess contribution was instead due to insufficient compensation, your only option is to obtain a return of contribution.

Your 2020 tax return will need to reflect whatever you do.