two consecutive years of making excess Roth IRA contributions when income was too high

[isnobrd58]

I am over 60.  I made a $7k Roth contribution May 2021 for year 2020 before filing that year. Then this year, 2022 discovered my MAGI was too high.  Also made Roth contribution early April 2022 for year 2021 of $5717 and again MAGI to high.  Now have both as excess contributions and need to pull them out.  

I think i can do an amended 2020 tax and pay the 6% penalty tax of $420 and leave in the earnings and just take out the $7k to rectify the 2020 excess contribution?

But if I do the amended 2021 return for both amounts combined $7000(2nd year excess) and $5717=$12,717, before Oct 15,2022 do I have to take the earnings as a distribution too?  and is there a tax liability on those?  I know i don't have to pay the 10% early withdrawal because of age, but also thought i didnt have to pay on earning if the Roth account was established for 5 or more years?

How do I go about accomplishing this in Turbo Tax and what is my tax liability?  Especially dealing with an overlapping excess and a new one all in the same 2021 return!

Any help is much appreciated!

[macuser_22]

You are correct that you must amend both 2020 and 2021 for the 2020 excess and pay the 6% penalty each year since the excess was not removed until  2022.    The 6% penalty repeats every year until removed.

In TurboTax on the amended  return go to the Roth contribution interview and step through until it asks about an excess.   Enter it and it will add a 5329 form for the penalty.

For the 2021 excess if you filed you 2021 return on time (by Apr 17, 2022) then you have until Oct. 15 2022 to get a "return of contribution" where only any earnings will be taxable.  Be sure  the financial institution will issue a 1099-R with  box 7 code JP that will have to go on an amended 2021 return when the 1099-R is received in Jan of 2023.

[isnobrd58]

Thank you so much for your quick response.  I was hoping I would avoid the 2nd year 2020 contribution's 6% penalty by taking the $7k distribution before the 2021 tax due date of Oct 15,2022.   But it looks like it doesn't work that way?  Sounds like once you go past the first year, you have no choice but to take the second year as a normal distribution and not a return of contribution, even if pulled out before the Oct. due date? 

In that case will I be allowed to keep the earnings for both years in the Roth with no tax consequences, and just take the distribution of the original $7k contribution?  Also, can you tell me if I will be assessed interest and late penalties on the $420(6% amount)?  I might still be ahead instead of taking the earnings as regular income.  Sounds like earnings distribution on excess contribution, is treated differently, then earnings taken on just a normal distribution if Roth held for over 5 years.  

Again, thank you and appreciate the help.  I won't make this mistake again!!

[fanfare]

@isnobrd58 

If you want to leave earnings in, you have to wait until after your extension date.

SO, you have to do it in two parts.

2020 excess contribution removed now without earnings.

2021 excess contribution removed later without earnings.

you will pay the 6% penalty per year on the excess due to the fact that you are waiting to remove the excess.

As the market goes down, your earnings evaporate unless you moved into all CASH recently.

[isnobrd58]

I think after reading a lot of the questions on this forum concerning Roth excess contributions, I’m following what you are saying about amending 2020 and 2021 taxes to include the 2020 excess contribution of 7k which if doing on turbo will generate form 5329 for both years to pay my 6% excise tax each year.   If it doesn’t flow for me on turbo I can do it by hand on the appropriate forms for each year

The questions I still have ....

1. Do I have to amend my calif state tax returns as well?

2.  Do I have to amend the 2021 federal /state again for the 2nd time in 2023 once I receive my 1099-R form showing a loss on earnings.  I am down the whole $5717 excess contribution and them some, so expect my earning to be zero.  If for some reason they are not and the 2022 form shows an earnings gain .  Do I need to amend again in 2023, for the newer excess I took in 2021 or is it better to wait to amend everything at once ?  I was thinking I might accrue more late fees and interest penalty?

Thank you

[macuser_22]

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@isnobrd58 wrote:

The questions I still have ....

1. Do I have to amend my calif state tax returns as well?

2.  Do I have to amend the 2021 federal /state again for the 2nd time in 2023 once I receive my 1099-R form showing a loss on earnings.  I am down the whole $5717 excess contribution and them some, so expect my earning to be zero.  If for some reason they are not and the 2022 form shows an earnings gain .  Do I need to amend again in 2023, for the newer excess I took in 2021 or is it better to wait to amend everything at once ?  I was thinking I might accrue more late fees and interest penalty?

Thank you

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#1)  I assume that you do. AFAIK CA follows Federal on this.

#2) No.   The 1099-R should just show the amount removed and when you enter it you say in the interview how much in prior year contributions you made.

You can always withdraw your own Roth contributions tax and penalty free.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

One of the followup questions will ask for your prior year** contributions not previously withdrawn. Those contributions that still remain in the Roth will not be taxed or subject to a early withdrawal penalty. That will add a 8606 form to your tax return with the Roth contribution and tax calculation in part III.

Note: **Prior year - any current year Roth contributions should be entered into the IRA contributions section. They will not show up in the prior years contributions but will be accounted for on the 8606 form that calculates the taxable amount.