I'll try to keep it short. Put too much in Roth IRA 2020, took it out Feb 2021. Filed my taxes. There is $150 in earnings that will need to amended in my 2020 when I get the 1099-R spring 22'. Therefore the $150 will increase my MAGI making my initial withdrawal not enough to cover this hole. Basically I'd have to pay a 6% penalty on maybe like $20, etc. Because this is a just opened Roth IRA with only a few thousand in. Doesn't it make more sense to just close out the entire account before April 15 and just pay the penalty on the earned income just one time on the amended return and not have to deal with the 6% penalty on the overage cause by the increase of MAGI by $150.

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vitaminDD

Level 2

Question

Should I just close my Roth IRA?

Forum|Forum|5 years ago
March 14, 2021
1 reply
0 views

I'll try to keep it short.

Put too much in Roth IRA 2020, took it out Feb 2021. Filed my taxes.
There is $150 in earnings that will need to amended in my 2020 when I get the 1099-R spring 22'.
Therefore the $150 will increase my MAGI making my initial withdrawal not enough to cover this hole.
Basically I'd have to pay a 6% penalty on maybe like $20, etc.

Because this is a just opened Roth IRA with only a few thousand in. Doesn't it make more sense to just close out the entire account before April 15 and just pay the penalty on the earned income just one time on the amended return and not have to deal with the 6% penalty on the overage cause by the increase of MAGI by $150.

DanaB27

Level 15

If you close your Roth account then please be aware you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. But the earnings will be included in your taxable income and you will have to pay a 10% early withdrawal penalty if you are under 59½.

You could also recharacterize the excess contribution as a traditional IRA and make it nondeductible to be able to convert it to the Roth IRA later. This way you avoid the 6% penalty. Also, there is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account.

If you want to do this then you will have to make this request with your bank to recharacterize your Roth contribution as a traditional IRA contribution.

If you choose to recharacterize the Roth contribution as a traditional IRA contribution then follow these steps to enter this on your amended 2020 return:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

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vitaminDDAuthor

Level 2

Turbo Tax said my excess was $2000 when I filed last month and I already removed the excess + earnings and submitted my return.

My question is would it be okay just to close the account instead of dealing with the MAGI going up and that calculated excess removed not being enough. I rather pay the 10% penalty on the measly few hundred earnings than have to amend another tax return to show I removed the excess caused by another excess on the same tax year.

DanaB27

Level 15

Yes, if you prefer to close the account then you can do this and will get a 1099-R 2021 for your distribution that you will include on your 2021 return. After you entered your 1099-R please make sure you answer all follow up questions in regards to the Roth IRA, so only the contribution amounts will be excluded from taxable income.

Please be aware you still get the 1099-R 2021 for the withdrawal of excess contribution and earnings which will have to be entered on your 2020 amended return (unless you reported it already on your original 2020 return by creating a 1099-R).

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