TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Level 3

Question

Roth IRA

Forum|Forum|6 years ago
June 17, 2020
3 replies
41 views

...

macuser_22

Alumni - Champ

@Timbo7 wrote:

Not thoroughly knowing the rules for the Roth IRA, we contributed $5,500 to our minor's Roth IRA in 2016. He did not have earned income until 2019. So, my understanding is that we now need to back-file a 5329 for each of those years (2016, 2017, 2018) to show the excess contribution carried year-over-year with the 6% penalty each time. Is this right? We also need to amend his 2019 return (his first ever return) with a 5329. Luckily his income in 2019 and 2020 will wipe out the overage, so we have not removed it.

If the above is correct, can we file all 5329s together and write one check? Do we need to include an additional penalty and interest payment now?

The penalty applies to him, not you. If he did not file tax returns for those year then he need to file now with the 5329 form. If he did file tax returns then he needs to amend those years and include the 5329 and penalty.

If he is qualified to make a 2020 Roth contribution the the excess can be applies as a 2020 contribution, otherwise it mist be removed before Dec 31, 2020 to avoid another penalty.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

fanfare

Level 15

I he earns over five thousand five hundred for three years that will "work off" the excess but he can't contribute more during that time. a 5329 is required each year to show the excess coming down. It may be worth paying the 6% penalty, especially if the IRA has grown.

If the IRA has not grown, you really have to ask yourself "Why?" given the surge in the stock market since election day..

dmertz

Level 15

When filing these forms, pay just the penalties calculated on the Forms 5329. The IRS will bill for any interest or other penalties.

fanfare

Level 15

If you have the custodian negate that contribution for 2019,

before the tax due date, you can apply the 2019 amount available to "work off" 2016 immediately.

dmertz

Level 15

I don't see it mentioned that there was any contribution made for 2019 that can be returned. From the details provided, it appears that the compensation for 2019 was insufficient to be apply the entire excess as a 2019 contribution, leaving some amount of excess to be resolved in 2020.

TwoTaxed

Level 2

Part One

When my daughter was 16 in 2020 she contributed $1,250 to her Roth. She was a dependent on our tax return, and she did not file her own return that year. Turned out, $1250 was not earned income. Whoops. So, we withdrew the $1250 from her Roth account to make things right.

First question set:

1. Does she need to file 2020 Fed AND State returns on her own, report her $1250 income and pay the 6% fine?

2. Does she also have to pay the 6% penalty on that $1250 on her 2021 return as well? If so, how to pay?

Part Two

In 2021, she contributed $6k to her Roth. It turned out she only had $2600 AGI income, and so should have only contributed $2600 to her 2021 Roth IRA. To fix this we removed the extra $3400 plus earnings from her 2021 Roth.

Second Question Set:

1. How does she pay her 10% fine on $3400 generated earnings for 2021?

2. Do these fines on the excess Roth contributions only affect federal returns?

Thank you

dmertz

Level 15

@TwoTaxed

First questions:

The answer depends on when and how the distribution from the Roth IRA was made. When was this distribution made? What is the code in box 7 of the Form 1099-R reporting the distribution from the Roth IRA? If the corrective distribution was after April 15, 2021, it could only be done by a regular distribution and 2020 Form 5329 Part IV would need to be filed stand-alone and the 6% penalty paid with that.
No.

Second questions:

The corrective distribution should have been done by a return of contribution. Assuming that this was done in 2022, this will be reported on a 2022 Form 1099-R with codes J and P in box 7, the sum of $3,400 and the earnings in box 1 and just the earnings in box 2a. You can enter this now in 2021 TurboTax as if you've already received this form and TurboTax will include the earnings on Form 1040 line 4b and on Form 5329 line 1. (If the corrective distribution for the $1,250 excess contribution for 2020 was made after April 15, 2021, Form 5329 will also show this distribution on line 20 to eliminate the excess carried into 2021 which should be present on line 18.)
As far as I know, no state assesses an excess contribution penalty, but as least one state (California, 2.5%) assesses an early-distribution penalty which would be due on the earnings distributed.

abcdef1231

Level 4

Thank you so much for your expert answer! We REALLY appreciate it. The content is dense, I'm still digesting the answers.

We are filing a 2020 return for her now because of this excess contribution issue.

For year 2020, the contribution of $1,250 was made on 12/11/2020. It was pulled out on March 4, 2022 from Vanguard. Vanguard said they will only return $1,250. The earnings stay in her Roth IRA. We haven't received the 1099-R yet. You are right, TurboTax generated a Form 5329. Part IV, line 25 shows $75 Additional tax.

By the way - this $1,250 was an injury settlement payment from Chipotle's legal department. As far as we can tell, this $1,250 should NOT taxable income, right?

We are in California but we don't see anything in the California return about the 2.5% penalty. Her tax due shows $0 in TurboTax.

For year 2021 your answer is packed - we have to soak that one tonight and might come back to you tomorrow to get more help.

Thanks again for sharing your awesome knowledge.