Withdrawing 2016 excess roth contribution in 2020 or 2021?

[Anonymous]

I made an excess roth contribution in 2016. I've paid 6% penalties for 2016, 2017, 2018, and 2019 via a 5329 which I've filed every year.

I am finally in a position to withdraw that excess and have received conflicting information about whether I can still withdraw the excess for 2020 and thus avoid the 6% penalty for that year. 1 phone rep at my IRA custodian said it is too late to withdraw for 2020, but another said I can mark the withdrawal for 2020, but I won't receive my 1099-R until next year, and she asked me to talk to a CPA for the tax ramifications of that.

I have tried calling a few tax advisors but have trouble reaching anyone and the 1 tax advisor I did reach wasn't actually able to answer my question.

Does anyone here know if an excess withdrawal for my 2016 contribution can still be made for 2020 and how that works with not receiving a 1099R until next year?

[dmertz · Accepted solution]

The first rep is correct.  It's too late to withdraw the excess in 2020.  However, if you are eligible to contribute to a Roth IRA for 2020, you can apply the excess as a 2020 Roth IRA contribution.  The second rep apparently thought that the excess contribution was one you had made for made for 2020, not 2016.

Assuming that you are not eligible to contribute to a Roth IRA for 2020, your 2020 tax return must include Form 5329 Part IV reporting the excess and paying the 6% excess contribution for 2020, the same as you have done for 2016 through 2019.

Correcting the excess in 2021 requires that you either be eligible to apply the excess as some or all of your 2021 Roth IRA contribution or for you to make a regular distribution of exactly the amount of the excess with no adjustment for any investment gain of loss.  The distribution will be reportable on your 2021 tax return as a nontaxable distribution of contribution basis and on Form 5329 Part IV, eliminating the excess and the penalty for 2021.  (Note that regular distributions are reportable on the tax return for the year in which the distribution is made.  Nothing about this distribution made in 2021 is reportable on your 2020 tax return.)

[Anonymous]

Thanks for the detailed response dmertz!

[Anonymous]

The moment of truth has arrived a year later and I am flabbergasted.

I finally withdrew my excess roth ira contribution in 2021. This year, I received a form 1099-R for 2021 for this withdrawal. The distribution code is "J8" (this differs from some other info I've read indicating the code should be "JP").

After entering this in Turbotax, I'm still seeing a 6% penalty on my Form 5329 :( I believe this is happening because in Part IV line 20 of that form, it lists my 2021 distributions as "0". I think this is wrong - it should be the amount that I withdrew, and if that was filled out, then I would not have the 6% penalty.

I called for live tax help and was told that the penalty will be removed next year instead. However, this reply from last year contradicts that, and what I see in Form 5329 Part IV Line 20 also seems to line up with last year's reply. Can someone help a confused and tired soul please?

[dmertz]

Code J8 on a 2021 Form 1099-R reports a return of a contribution that was made made in 2021, not 2016.  Did you make a Roth IRA contribution for either 2020 or 2021?

[Anonymous]

For the company which I received the 1099-R from, no I didn't. This was the withdrawal of my 2016 roth ira contribution.

But now that you mention it, I did do a mega backdoor roth in 2021 with a different company but I don't think that would affect what code which the first company puts on their 1099 unless there is some sort of central database these companies all share? The 1099-R I received for the mega backdoor roth has a distribution code of "G". 

[Anonymous]

I found the problem. The 1099-r distribution codes make no difference on form 5329. I'm guessing those codes are just for auditing purposes. What actually makes the difference is another section in TurboTax where it asks about prior year excess contributions. TurboTax had transferred over the excess that I had recorded in prior years. I changed it to 0 and that eliminated form 5329 and the 6% penalty.