Hello all! I would really love some advice about how to handle these errors that I made in 2020 and 2023 with my Roth IRA:
2020 - contributed $7,000 to Roth IRA; income was higher than expected; $2,029 is my reduced contribution limit; what to do now with the $4,971 excess?
2021 - contributed $7,000 to Roth IRA; income low enough to contribute (no problem)
2022 - no contribution to any IRAs; income low enough to contribute to Roth IRA
2023 - contributed $7,500 to Roth IRA; income was higher than expected; recharacterized to IRA by filing deadline but I must have clicked the wrong button because $8,467 was recharacterized to my IRA; what to do with the excess contribution to my IRA
2024 - contributed $4,628 to my IRA so far; income will be too high for Roth IRA
In all these years, neither my spouse nor myself has an employee sponsored retirement plan.
Many thanks for assistance on how to resolve these these errors!
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I will give you some generalities and I think @dmertz will clean up anything I miss..
For 2020: you have a $4971 excess contribution. You need to file an amended 2020 return to include form 5329 and pay a 6% penalty on the excess contribution (unless you already paid it).
For 2021: you have $4971 excess contribution carried over. You need to file an amended 2021 return to include form 5329 and pay a 6% penalty on the excess contribution (unless you already paid it).
For 2022: if you were eligible to contribute to a Roth but did not, you can treat your previous excess as if it is a new 2022 contribution--basically you can "use up" the excess by applying it to the 2022 limit. You need to file an amended 2022 return to include form 5329 and report the application of the prior excess contribution as a new 2022 contribution. No further penalty is owed on your 2022 return and there is no more excess to carry forward.
Note that when you file the amended 2020 and 2021 returns and pay the penalties, the IRS will probably come back and bill you for interest on the late payments, backdated to the tax deadlines (May 17, 2021 and April 17, 2022, respectively).
For 2023: When recharacterizing your Roth contribution to a traditional IRA, you must also move over any earnings. That is probably what the extra $967 was, although you should contact the broker if you aren't sure. The recharacterized earnings are not taxable to you, and they are not a contribution, they were tax-free earnings in the Roth and they go into the IRA as tax-free earnings (to be taxed later when you withdraw them).
The key question for 2023 is whether you took a tax deduction for the $7500 recharacterized contribution or not. If you did not take a deduction (either by choice or income too high for a deduction) then you now have a non-deductible basis in your IRA and you should have a form 8606 with your tax return. You need to keep your form 8606's for the rest of your life to prove that future withdrawals are partly non-taxable; this is an exception to the rule that most tax papers can be discarded after 6 years.
Then for 2024, are you making deductible or non-deductible contributions? If you are adding to your non-deductible basis, you should get a new form 8606 that tracks the 2023 non-deductible basis plus new non-deductible contributions.
Oh, this is brilliant, thank you so much!
Because neither of us has an employee sponsored retirement plan we can deduct our IRA contributions. For 2023 I erroneously failed to include the contribution so I'm guessing that now I need to file an amendment for 2023 and include the $7,500 deductible IRA contribution? And for 2024 I will include the IRA contributions as I should.
This leads to another question...can I use any of our FTC carry from previous years to pay for the penalties? We have FTC carry in every one of those years, so could I use the 2021 credit carryback to pay for 2020 penalties and the 2022 credit carryback to pay for the 2021 penalties? Thanks again!
@FrauStachowski wrote:
Oh, this is brilliant, thank you so much!
Because neither of us has an employee sponsored retirement plan we can deduct our IRA contributions. For 2023 I erroneously failed to include the contribution so I'm guessing that now I need to file an amendment for 2023 and include the $7,500 deductible IRA contribution? And for 2024 I will include the IRA contributions as I should.
This leads to another question...can I use any of our FTC carryover from previous years to pay for the penalties? We have FTC carryover in every one of those years, so could I use the 2021 credit carrover to pay for 2020 penalties and the 2022 credit carryover to pay for the 2021 penalties? Thanks again!
FTC, foreign tax credit?
The answer appears to be "no". However, you will find out when you prepare the 2020 and 2021 amended returns.
The foreign tax credit is non-refundable, it flows from form 1116 to schedule 3 line 1. All non-refundable credits are totaled on schedule 3 line 8, and applied to form 1040 line 20. That means it comes after your income tax (line 16) and AMT (line 17), but it comes before your "other taxes" on line 23. The penalty for excess IRA contributions flows from form 5329 to schedule 2 line 8. All your "other taxes" are totaled on schedule 2 line 21 and go to form 1040 line 23.
So the penalty comes after the foreign tax credit, meaning that unusable foreign tax credit amounts won't reduce the IRA penalty.
@FrauStachowski wrote:
Oh, this is brilliant, thank you so much!
Because neither of us has an employee sponsored retirement plan we can deduct our IRA contributions. For 2023 I erroneously failed to include the contribution so I'm guessing that now I need to file an amendment for 2023 and include the $7,500 deductible IRA contribution? And for 2024 I will include the IRA contributions as I should.
Yes you need to report the contribution to a traditional IRA on an amended 2023 tax return. Start by reporting it as a Roth contribution and then report the Recharacterization. Instructions are here.
If the contribution is tax-deductible, you will get a refund if you did not already take the deduction. If the contribution is non-deductible (due to your income or by choice) then you will generate a form 8606 that you need to keep a copy of.
Yes, new 2024 contributions are reported on your 2024 tax return in the normal way.
I agree 100% with what Opus 17 said.
Thanks so much!
Good to know, thank you!
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