Roth IRA Excess contribution removal after filing my taxes - now what?

[ys00211]

Hi, apologies if this question has been answered elsewhere, but I'm having a difficult time applying the various responses to my particular case. 

My situation: I contributed to my Roth IRA in tax year 2018, then I received an unexpected income in stock that bumped me outside the eligible income bracket for Roth IRA contributions. Unfortunately, I realized this only after I had already filed my returns for tax year 2018 (in March 2019). Since then I have removed the excess contribution + the earnings in June 2019. Note: I proactively removed the excess contribution, I did not receive a letter from the IRS.

I've researched what to do next on various online forums and even spoke with a tax advisor, but I'm not sure what I need to do exactly. Online communities said that I have until October 2019 to file an amendment to my 2018 tax returns to avoid any penalties. My tax advisor says she can't do anything until I receive a 1099R form from my brokerage (through which I had established by Roth IRA) because she needs proof that I made a ECR/distribution. I asked the brokerage firm when I would receive this form and was told it would be available in April 2020. It sounds to me I would be missing my deadline to amend my taxes because this form would not be available until after the deadline.

What am I misunderstanding here and what is the correct next step for my case? Thank you in advance for all your help!

[dmertz · Accepted solution]

The October 15, 2019 deadline was to receive the corrective distribution, which you've already done.  What you you have left to do is amend your 2018 tax return to include the earnings which are subject to 2018 income tax and, if no penalty exception applies, to a 10% early-distribution penalty, and also to remove the 6% excess contribution penalty if you had originally reported the excess Roth IRA contribution.

To amend using 2018 TurboTax you can either enter the code JP 2019 Form 1099-R as you expect to receive it in 2019 (total distributed in box 1 and just the earnings in box 2a) or, as your tax advisor suggested, wait until you actually receive this Form 1099-R near the end of January 2020.  You should also go through the IRA contribution section, make sure that you have entered the original Roth contribution then indicate that you had the original contribution amount returned.  The filed amendment will be the same either way.  This Form 1099-R does not get attached to your amendment.  Your explanation statement regarding the contribution and it's return, including the amount of attributable earnings, is all that is needed to accompany Form 1040X (along with payment of a balance due, if any).

[ys00211]

Hi @dmertz thank you so much for the quick response! Just a couple follow up questions -

1. To confirm, the October 15 deadline only applies to removing the excess contribution and *not* when I actually need to file the 1040X by? That was the biggest confusion for me, because if there are no additional penalties / consequences to waiting until next year to file the amendment, I would prefer to wait until I receive the 1099-R just to be safe that I fill out the 1040X form correctly. 

2. When I fill out my 1040X, do I simply add the withdrawn amount (excess contribution withdrawn + earnings) to Line 1 (for AGI net change) on form 1040X?

Thanks again!

[dmertz]

1.  Correct.

2.  No.  Only the earnings are taxable, so only the earnings appear in Form 1040X line 1 column B.  If you previously reported the excess Roth IRA contribution on 2018 Form 5329 Part IV, Form 1040X line 10 will reflect the elimination of the excess-contribution penalty and you'll include an updated Form 5329 Part IV to show that the penalty is now zero instead of what was reported on your originally filed Form 5329.  If you were under age 59½ at the time of the return of contribution distribution, Form 1040X line 10 will show an increase by 10% of the earnings and you'll include Form 5329 Part I to show the earnings on line 1 and calculate the 10% early-distribution penalty on the earnings.

[ys00211]

Thank you!

[sabasu]

I am in a similar situation and I stumbled upon this post while searching thru the forums for an answer to my situation.

I inadvertently made an excess Roth contribution ($7000) for tax year 2020. I withdrew the amount yesterday (Jan 22). Now, I understand I need to file an amended return for 2020.  My Roth IRA brokerage is saying that I will receive a 1099-R only in 2023.

My questions are as follows :

1. For 2020, do I need to withdraw both the excess contribution ($7000) and the NIA (earnings)? I read somewhere, that withdrawing only the excess contribution is enuf, earnings need not be withdrawn. 

2. Since I am below 59.5 years of age, will this withdrawal of excess contribution ($7000) attract an early withdrawal penalty. I was under the impression that the early withdrawal penalty for a Roth account is only applicable to the EARNINGS and not my contribution (which has been already taxed). And since I have not withdrawn any earnings, do I still need to pay Early Withdrawal Penalty on my contribution only.

3. Can I file the amended 1040X for 2020 now, even without the 1099-R. In that case, what would be my explanation?

[Opus 17]

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@sabasu wrote:

I am in a similar situation and I stumbled upon this post while searching thru the forums for an answer to my situation.

I inadvertently made an excess Roth contribution ($7000) for tax year 2020. I withdrew the amount yesterday (Jan 22). Now, I understand I need to file an amended return for 2020.  My Roth IRA brokerage is saying that I will receive a 1099-R only in 2023.

My questions are as follows :

1. For 2020, do I need to withdraw both the excess contribution ($7000) and the NIA (earnings)? I read somewhere, that withdrawing only the excess contribution is enuf, earnings need not be withdrawn. 

2. Since I am below 59.5 years of age, will this withdrawal of excess contribution ($7000) attract an early withdrawal penalty. I was under the impression that the early withdrawal penalty for a Roth account is only applicable to the EARNINGS and not my contribution (which has been already taxed). And since I have not withdrawn any earnings, do I still need to pay Early Withdrawal Penalty on my contribution only.

3. Can I file the amended 1040X for 2020 now, even without the 1099-R. In that case, what would be my explanation?

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Nothing in the above discussion applies to you, because the deadline to remove an excess contribution for 2020 was October 15, 2021.  You have to deal with an entirely separate set of rules.

For 2020, you have an excess contribution.  It is subject to a 6% penalty.  This should already have been applied, if you told Turbotax that you contributed the $7000 and you weren't eligible based on your other tax facts.  Check your 2020 return for a form 5329, which calculates the penalty.  If you did not pay a penalty in 2020, then you need to amend your 2020 return.  This has nothing to do with withdrawals (a 1099-R). You report your contributions, and if you aren't eligible, Turbotax will tell you to remove the excess.  When you answer that you can't or won't remove the excess before the deadline (because it is too late), then Turbotax will assess the penalty.

Moving on to 2021.  If you were eligible to make contributions for 2021, you can count the 2020 excess as a new 2021 contribution and that will zero out the excess.  If you contributed $7000 for 2021 already, but removed it in 2022, then what should happen is that the excess from 2020 will be applied to your 2021 contribution limit, and no further penalty will be assessed.  If you are not eligible, then because the excess from 2020 was still in your account on 12/31/2021, you will be assessed another 6% penalty (because you can't perform a removal of 2020 excess contribution in 2022.  It's too late).  Either of these calculations will also happen on your 2021 tax return on form 5329.  You will need to file the amended 2020 return first, because the numbers from the 2020 form 5329 will carry over to the 2021 form.  (Again, no 1099-R is required or will be issued, since this is a contribution problem, not a withdrawal problem.)

Moving on to 2022, since you have withdrawn the 2020 excess contributions in 2022, there will be no further assessment of the 6% penalty for excess contributions on your 2022 tax return (to be filed 13 months from now). Withdrawal of earnings was not required, but if you did withdraw earnings, the earnings will be subject to regular income tax if the Roth IRA is less than 5 years old, and will be tax-free if the Roth IRA is more than 5 years old.

You will not have to pay any 10% penalty for early withdrawal because of your age, but you will have to pay regular income tax on any earnings that you withdraw if the Roth account has been opened less than 5 tax years, even if you are over age 59-1/2. 

[sabasu]

Fantastic!! You are a true Champ! Thanks for your detailed explanation. I tried to digest it and below are my conclusions. I will be grateful if you could kindly confirm my understanding to your answer.

1. First paragraph of your answer – Yes, I confirm that I was subject to the 6% penalty on my excess contributions of my Roth IRA of $7000 = $420 in my 2020 tax return. This amount was reflected in line 25 of form 5329 of 2020.
2. Second paragraph of your answer - The excess contribution of $7000 is still in my account on 12/31/2021. So, to avoid the 6% penalty in 2021 taxes again, I will need to amend the 2020 return first, BEFORE filing my 2021 taxes. So, per you no 1099-R will be issued (even though my brokerage said a 1099-R MAY be issued in April of 2023).
3. Third paragraph of your response – Withdrawal of earnings on my excess contributions in 2020 is not required. [BTW, is this called ‘true excess’ as I read in other places]
4. Fourth paragraph of your response – My Roth IRA account is less than 5 years old. In that case do I need to calculate and withdraw the NIA (earnings) on my excess contribution in 2020 and include the earnings as income in my amended return for 2020. But will they attract a 10% early withdrawal penalty? On the earnings only or earnings + the return of my excess contributions?

So, net-net, I will need to file an amended 2020 return, knock off the excess contribution and the penalty and then file my 2021 taxes. No 1099-R is required for this purpose. I was also thinking on similar lines of your response, but was thrown off on the 1099-R part and the additional penalty part. Right?

Once again, thanks a million!

[Opus 17]

@sabasu 

1. Then you are done for 2020.  You paid the penalty, you have nothing to amend.

2. You can't avoid the 6% penalty for 2021 unless you are eligible to make contributions for 2021.  If so, you can count the 2020 excess as a 2021 contribution.  If you are not eligible to contribute in 2021, you pay the 6% penalty again.  (Again per #1, you don't amend 2020 because you paid the penalty, there is nothing to amend.)

3. Correct.  There is no penalty assessed on Roth earnings derived from excess contributions.  The penalty is on excess contributions.

4. All withdrawals of contributions from a Roth IRA are always tax-free.  To avoid paying another 6% penalty on your 2022 tax return, you must withdraw the excess contribution from 2020 during 2022. But it sounds like you already did this.  There is no need to withdraw earnings.

If you do withdraw any earnings, the withdrawal is subject to 2 different tax rules.

a. Non-qualified withdrawals are subject to income tax.  A withdrawal is only qualified if you are over age 59-1/2 and you opened your first Roth account at least 5 tax years ago.  

b. Early withdrawals (before age 59-1/2) are also subject to a 10% penalty.

If you withdraw earnings now for any reason, it will be non-qualified, because the account is less than 5 years old, so it will be subject to regular income tax.  But you won't pay the additional 10% penalty for early withdrawals.  ("Early" and "non-qualified" are separate concepts, although this can be confusing.)

At this point, you paid the penalty in 2020.

You are stuck paying another 6% for 2021, unless you are eligible to make new contributions for 2021.

If you withdraw the $7000 from 2020 during 2022, it will be tax-free and it will make the 6% penalty go away for 2022.

Leave your earnings alone until your account has been open at least 5 tax years, then you can withdraw the earnings at any time tax-free.  If you need the money sooner, you will pay regular income tax.

(The 5 year tax rule works like this.  If you opened the account on 12/15/2020, then 2020 is year 1.  2024 will be year 5, so you can make qualified withdrawals starting on 1/1/25, which is the beginning of year 6 even though it will not have been 1825 days.)

[sabasu]

I am not eligible to make a Roth contribution to 2021 either. So, I pay the 6% penalty for 2021 again, w/o amending the the 2020 return. That is ok with me. But I did not understand the part where you say "If you withdraw the $7000 from 2020 during 2022 (which I did on 11th Jan 2022), it will be tax-free and it will make the 6% penalty go away for 2022." In 2022's (next year's) form 5329, don't I have to show the $7000 - oh....got it, I am removing it in 2022, so no more 6% penalty in 2022. But how will IRS know...the 1099-R that will be issued to me next year?

I have bothered you already. Feel free to answer otherwise it's ok, I owe you a million additional thanks! 

[Opus 17]

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@sabasu wrote:

I am not eligible to make a Roth contribution to 2021 either. So, I pay the 6% penalty for 2021 again, w/o amending the the 2020 return. That is ok with me. But I did not understand the part where you say "If you withdraw the $7000 from 2020 during 2022 (which I did on 11th Jan 2022), it will be tax-free and it will make the 6% penalty go away for 2022." In 2022's (next year's) form 5329, don't I have to show the $7000 - oh....got it, I am removing it in 2022, so no more 6% penalty in 2022. But how will IRS know...the 1099-R that will be issued to me next year?

I have bothered you already. Feel free to answer otherwise it's ok, I owe you a million additional thanks! 

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Right, you will get a 1099-R on January 31, 2023, for the 2022 withdrawal.  That won't be taxable income but it will go on your 2022 form 5329 to clear off the old penalty for excess contributions. 

[nibroc22]

Hello - I've been doing quite a bit of reading online to figure out my situation, hoping I could get some clarity as well. 

Early 2021, I contributed $6000 to Roth IRA for 2021, then in March 2022, I contributed $3000 to Roth IRA for 2022. I realized that I'd be submitting 2021 taxes as married filing jointly for the first time in April 2022. With the combined income, it set us over the limit. I panicked and distributed $6000, $566 and $2977 (total of $9544) on April 22, 2022. 

Now I'm realizing I'd need to correct the error and pay the 6% penalty, but having trouble calculating 'excess' Would that be $9000 - our MAGI? And 'earnings' would be unrealized gains from Vanguard in 2021?  

Can I account for the penalty when I file for 2022, or should I file a 1040x and 5329 before completing this year's taxes? Thank you very much @dmertz 

[DanaB27]

First, since you removed the excess contribution for 2021 plus earnings before the extended due date of the 2021 return and the excess contribution plus earnings for 2022 before the due date you will not have to pay the 6% penalty. Please see Pub 590-A Withdrawal of excess contributions for details.

You should have received two 2022 Form 1099-R:

One for the excess contribution plus earnings for 2021 with codes PJ in box 7 (belongs on your 2021 return). The taxable earnings will be listed in box 2a.

One for the excess contribution plus earnings for 2022 with codes 8J in box 7 (belongs on your 2022 return). The taxable earnings will be listed in box 2a.

After you enter the Form 1099-R on your return TurboTax will automatically calculate the 10% early withdrawal penalty on the earnings if you are under 59 1/2 (if you are over 59 1/2 enter the amount of earnings under "Another reason" on the "Did you use your IRA to pay for any of these expenses?" screen).

Please see How do I amend my federal tax return for a prior year?

@nibroc22