Roth IRA excess contributions - how to handle now (Dec 2024)

[john307sf]

Hello all! I’d appreciate some advice on how to handle a Roth IRA excess contribution issue from 2021:

2021: Contributed $6,000 to a Webull Roth IRA, but income was above the limit (filed as Married Filing Separately with income over $10,000). What to do now with the $6,000 excess?
2022: Contributed $6,000 to the same Webull Roth IRA (eligible this year, no issues).
2023: Contributed $6,500 to a Vanguard Roth IRA (eligible this year, no issues).
2024: Contributed $7,000 to the same Vanguard Roth IRA using the backdoor method (no issues).

I plan to remove the $6,000 excess contribution from 2021 now (2024).

Current balance of my Webull Roth IRA account: approximately $13,500, with around $1,500 in capital gains/earnings.

Questions:

• How can I resolve these errors?
• Do I need to calculate and withdraw the Net Income Attributable (NIA), or can I remove just the $6,000?
• Will I be subject to any excise tax for the excess contribution, and if so, how can I resolve that?

Additional info: I don't have any Traditional IRA or 401(k) plans (all $0).

Many thanks in advance for your assistance!

[dmertz · Accepted solution]

As you propose, to correct the excess Roth IRA contribution from 2021 and avoid a penalty for 2024, you must before the end of 2024 (completed today or tomorrow) obtain a regular distribution from your Roth IRA(s) of exactly $6,000, no adjustment for investment gain or loss.  Tell the Roth IRA custodian nothing about this distribution being to correct an excess contribution.  This distribution will be a nontaxable distribution of contribution basis reported on your 2024 tax return.

With regard to penalties, you owe a 6%, $360 penalty for each year 2021, 2022 and 2023 (and 2024 if you fail to obtain the corrective distribution in the next two days).  You'll pay these along with filing 2021, 2022 and 2023 Forms 5329.

An alternative to having the 2021 contribution be an excess contribution might be to amend 2021 to Married Filing Jointly.  You have until April 15, 2025 to do that, if it makes sense.

[john307sf]

Thank you for your guidance; I truly appreciate it.

Regarding the timing, I was under the impression that I had until April 15th, 2025, to withdraw $6,000 for the 2024 tax year to avoid the excise tax for 2024.

Is that not applicable in this situation?

[dmertz]

The due date of your 2024 tax return, including extensions, would be the deadline to obtain a return of a contribution made for 2024.  To have obtained such a return of of the 2021 excess contribution it would have to have been obtained by the due date, including extensions, of your 2021 tax return.  Since we are well past that deadline with respect to an excess contribution made fore 2021, the corrective distribution must be made by year-end.  Only if it is completed by the end of 2024 can it appear on line 20 of your 2024 Form 5329 to reduce the excess carried in from 2023.  Without that, the penalty is not eliminated for 2024.

[john307sf]

Thank you again @dmertz  for your guidance—it’s been incredibly helpful.

I have a few follow-up questions about the withdrawal process (screenshot attached):

1. Federal Income Tax Withholding: Webull defaulted to a 10% rate. Should I set this to 0%, given that this withdrawal is to correct an excess contribution?
2. Distribution Reason: The only option is “Early Distribution (Under Age 59½).” Will this cause issues when reporting on my tax return?
3. Residency Change: I was an Ohio resident in 2021 but have been a California resident since 2023. Does this affect the tax treatment of the withdrawal?

Any additional advice to ensure this is processed correctly would be greatly appreciated.

John

[dmertz]

1.  The $6,000 distribution from your Roth IRA will not add to taxable income because it is a distribution of contribution basis, determined on Part III of Form 8606.  Whether or not you should have taxes withhold depends on whether or not your tax withholding from other sources is sufficient to cover your tax liability from your taxable income.  On your tax return, tax withholding is applied to your overall tax liability, not to any particular income item.  If you don't need to generate additional tax withholding, you can request that no taxes be withheld.  The options are generally 0%, 10%, or more than 10%.

2.  Early distribution is the correct selection.  The distribution will not be subject to the 10% penalty because only taxable distributions are subject to this penalty.

3.  This has no effect on your state tax returns.  Because the distribution is not included in federal taxable income, it won't be included in your state (California) taxable income.

[john307sf]

Hi @dmertz ,

Thank you for your earlier guidance—it’s been invaluable in navigating this process. I’m happy to share that I was able to complete the withdrawal of the $6,000 excess contribution on the last day of 2024. I’m really thankful for your timely guidance.

As I work to ensure everything is reported correctly, I wanted to confirm the next steps for proper reporting.

1. Forms and Reporting: What forms or changes will I need to submit, and for which tax year(s)?
2. Amending Past Returns: Do I need to amend any previous tax returns (e.g., 2021 when the excess was first contributed)? If so, will this involve submitting just specific forms (e.g., Form 5329), or do I need to refile the entire return?
3. Additional Steps: Is there anything else I need to do to fully correct this issue and avoid further penalties?

Your insights would be greatly appreciated to ensure this is handled correctly.

Thank you again for your time and expertise,
John

[dmertz]

You have Form 5329 to file for 2021, 2022 and 2023 to report the excess $6,000 and pay the 6% excess contribution penalty for each of these years, the total penalty payment being $1,080.  These are to be filed by mail separately from filing your 2024 tax return.  It probably wouldn't hurt to include a Form 1040-X with each of these years showing that there is no change to your taxes for those years other than the penalties.  The Forms 1040-X also provide a place to provide explanation.  Although the examiner should probably accept the Forms 5329 stand-alone (there is a signature block on Form 5329 to allow this form to be filed stand-alone), sometimes they will ask for Form 1040-X.

Your 2024 tax return will include on Form 1040 line 4a the $6,000 from the 2024 Form 1099-R and 2024 Form 5329 will show that the distribution eliminates the excess $6,000 carried in from 2023.

Nothing else needs to be done with regard to filing.  Just make sure that your Roth IRA contribution basis going forward reflects the reduction in basis resulting from the $6,000 distribution.

[john307sf]

Thank you for your guidance @dmertz 
I actually just found out, Webull can't code my withdrawal as return of contributions (not earnings). Instead, they said below. 

Webull: "We can not code this distribution as a return of contribution but we can treat it as an excess contribution removal after the deadline for reporting."

Is what's they are saying the same as what I requested, just a different way of phrasing it?

[dmertz]

Yes they are saying the same thing.  A distribution of excess after the due date of the corresponding tax return is just a regular distribution, code J if you are under age 59½.  That's why for a distribution of excess after the due date of the tax return I suggest not even telling the Roth IRA custodian that the distribution is to resolve an excess contribution.  Webull got it right.  Less competent IRA custodians such as banks often don't and they process a return of contribution before the due date of the tax return when there is actually no such contribution to return, making a mess.

[john307sf]

Thank you again @dmertz for your guidance. Webull informed me that the distribution will be coded with both J and P as an excess contribution removal after the deadline.

Will this dual coding affect the nontaxable treatment of the $6,000 or require any additional steps when filing my tax return?

[dmertz]

"Webull informed me that the distribution will be coded with both J and P as an excess contribution removal after the deadline."

Doing so would be erroneous.  Code P can only be used for a return of contribution before the deadline.  The correct coding is J only.

[john307sf]

Thank you, @dmertz , for clarifying the correct coding. I reached out to Webull and asked them to correct the coding to J only. I’ll update once I hear back. Thanks again for your help!

[john307sf]

Hi @dmertz 

I followed up with Webull, but they are refusing to correct the 1099-R coding. They insist that the distribution must be dual-coded with both J & P, even though this was an excess contribution removal after the deadline. Their response:

"Our back office operations team has confirmed this is the correct code for your situation and we will not make further adjustments. Code P will identify this as an excess contribution removal after the deadline, while code J indicates a premature distribution from a Roth IRA. I will attach an IRS link below detailing the different 1099-R codes and applicable situations they are used in. If you believe this is not accurate you can self report this distribution and have your tax advisor self report the distribution code they believe is most relevant."

Given this, how should I handle my tax return? 

Also, do you work for TurboTax, and is there a way to hire you directly for tax preparation? I’d love to have someone as knowledgeable as you assist with this process.

Thanks again for your help!

[dmertz]

You'll need to submit a substitute Form 1099-R (Form 4852) using the correct code (code J only), and provide explanation.

Because the requirements surrounding retirement accounts are so complex and subject to misinterpretation, I've simply been studying IRS documentation regarding retirement accounts (among other things, the instructions for Form 1099-R) for about 15 years.  I've been a TurboTax user for about 30 years.