What/how do I report a removal of excess Roth IRA contribution made in 2018?

[DavidS127]

No, you will not receive a 1099-R right away for the withdrawal of the 2019 excess contribution.  You will get a 2020 1099-R sometime in early 2020 reporting the removal of the excess contribution and any associated earnings.  You will need to amend your 2019 tax return at that time if there are earnings on that 2019 excess contribution.

You don't report anything on your 2019 tax return at this time, not even that you made the 2019 Roth excess contribution.  Because you are having it withdrawn by the due date of your tax return, it is as if it was never made for the tax return you are filing.

If your withdrawal of the excess contribution isn't going to be made by 7/15/2020, you can file an extension of your tax return on 7/15/2020, to give your trustee more time to get the excess contribution removed.  Then when you ultimately file your 2019 tax return, you will not report the 2019 excess contribution.

@kapsabhi

[kapsabhi]

@DavidS127 This was super helpful and clear. Appreciate all the help.

3 follow up questions:

1. I have asked my trustee to remove full contribution amount that turbotax showed me was my excess. Trustee assured I will get some sort of profit/loss statement based on investments. If there are earnings, do I need to remove those earnings from Roth IRA account as well?

2. Should any profit/loss info shared by trustee  be reported in 2019 filing (assuming extension filed for Oct 2019)?

3. You recommended to amend 2019 Tax Return in early 2020 after receiving 1099-R. I have never amended my past returns. Does that amendment complicate anything for 2020 Tax Filing or have any implications of any sort?

[DavidS127]

1. Yes, for your withdrawal of a 2019 excess Roth contribution, part of the IRS requirement is that any earnings (or loss) associated with that excess contribution also be removed.  Your trustee should take care of that for you when they remove the excess contribution.
2. If you extend, it just allows more time to get the excess contribution out of your Roth in compliance with the "treat it like it never happened" goal.  You'll still get a 2020 1099-R, and if that 1099-R has earnings in box 2a, you'll need to amend the 2019 tax return to report that interest income. 
3. No, amending your tax return for just the investment income on your excess contribution won't impact your 2020 tax return.  Click this link for instructions on how to file an amended return with TurboTax.

@kapsabhi

[sjsingh2]

Hi @DavidS127 @dmertz 

One question regarding past years' Excess Roth.

I have excess Roth for following years which I have removed before filing taxes for 2019:

2014 - 1100

2015 - 1200

2016 - 1200

2017 - 1200

2018 - 1200

For 2017 and 2018 - I'll file amended returns and pay fine for excess roth by filling 5329 for those 2 years

However, for 2014-16, I have 2 options:

Option a)   I cant file an amendment now for those years.  I read somewhere that I could file 5329 on its own for past years (since I cant now file amendment for those years).  Is this possible? If so, how to go about it?

Option b)   I was told not to worry about a few 100$ in fine and not poke the bear.  IRS is not going to come back and ask for it since the statute of audit is past and they are not going to come for $100 for 3 years, not now and not down the line. So, basically, not do anything for the 2014-2016 years.

Can you please share your guidance on which option to pick OR if there are any other options for me, do share!

Thanks

[dmertz]

Option A is the only legal alternative.

The tax court has ruled that Form 5329 is considered to be a separate tax return, so the statute of limitations on the IRS assessing the excess contribution penalties for 2014 through 2016 does not start to run until you file Forms 5329 for those years.  Additionally, since the excess is subject to penalty each year the excess remains in your Roth IRAs, so your 2017 Form 5329 should be showing $6,900 on line 18, carried forward from line 24 of your 2016 Form 5329.  Omitting that would be fraudulent.

The penalties calculated on your 2014 through 2016 Forms 5329 will be $690, not just "a few $100."

[sjsingh2]

Thanks so much! @dmertz. I’ll proceed with option A and clean this up.

Do I have to wait to attach these 5329 forms for past years till next year when I file 2020 taxes OR can I post it now to IRS as a separate package?

[dmertz]

The Forms 5329 for prior years must be sent separately from your current year's tax filing.

[sjsingh2]

Thanks so much!

[JobeTP]

Re: Diane suggestion

When you say "Which Year" are you referring to box 11 on the 1099R?  There is no field that explicitly says: "Which Year".

Thank you.

[dmertz]

"Which Year" refers to the particular page in TurboTax where TurboTax presents the follow-up question asking which year is the year of the Form 1099-R for any Form 1099-R entered that includes code P in box 7.  Box 11 of Form 1099-R is only used for distributions from a Designated Roth Account in a qualified retirement plan reported with code B in box 7, not for a return of contribution reported with codes J and P in box 7.

[gonglien]

@dmertz I wish I read this before I amended my return. Please help me on a couple of questions regarding my situation.

I made excessive contribution of $6000 to Roth IRA for 2019 in 2020 and didn’t realize it until December 2020. I had my brokerage firm to remove the excess contribution and associated earning in January, and amended my tax in TurboTax 2019. Then I mailed my amended tax return (passed the electronic transfer window) and paid $360 fine on IRS website. I received my 1099 R of $ 9100 ($6000 + $3100 taxable earning) for this distribution with code 8J and TurboTax is calculating that I need to pay 10% early withdrawal fee to the whole amount. Is this correct? I thought since it was removing excess contribution, it shouldn’t be considered early distribution.
TurboTax 2019 also still shows the $360 fine as the money I owe to IRS. When I transferred information from turbotax 2019 to 2020, It got carried over. I think to avoid it, I just have not to transfer information from TT2019 to 2020 and manually input my information. Is this the right way to do?

[dmertz]

gonglien, December 2020 should have been too late to obtain a return of a 2019 contribution before the October 15, 2020 extended due date of your 2019 tax return.  This Form 1099-R seems to be reporting a return in 2020 of a Roth IRA contribution made for 2020.

[gonglien]

@dmertz You are correct it was too late, therefore I had to pay 6% fine. I made the contribution in April 2020 for the year 2019, since it was before tax deadline. 

[dmertz]

A code 8J Form 1099-R for a distribution made in December 2020 would have nothing to do with a 2019 contribution.  It would presumably be for a return of a contribution made for 2020.  If you made a contribution for 2020 and then had it returned, you could the apply the excess from 2019 as a contribution for 2020, if you were eligible to make a Roth IRA contribution for 2020.  (Note that TurboTax currently has an error-checking bug related to applying a prior-year excess as a current-year contribution.)

[gonglien]

@dmertz Now I am extremely confused. Here is my timeline.

1. Made a contribution of $6000 to Roth for Tax year 2019 in April 2020.

2. filed income tax for 2019 in July 2020

3. Realized that I was over income limit and contacted my brokerage firm on December 2020. I was told it already passed the October 15th deadline for 2019 tax return and they would make a normal distribution of this amount to remove it. This was done mid January 2021

4. Amended my 2019 return in end of January and paid $360 fine.

Now I feel like I might have done something wrong. Please advise