What/how do I report a removal of excess Roth IRA contribution made in 2018?

[rgordon93]

 @dmertz     I have a similar situation I am trying to work thru now. In 2018 I contributed $500 to my RothIRA. I was phased out and should have not contributed anything. I removed the $500 in 2022 (actually $395 because I lost on the investments I made with the $500). Now that the 2018 contributions are removed how do I proceed? Do I need to amend my 2018-2020 taxes? I have not done my 2021 taxes yet. How to I claim the 6% penalty. Thanks, Ross 

[dmertz]

Because the correction was done long after the due date of your 2018 tax return, investment gain or loss on the $500 contributed for 2018 is irrelevant.  Correct by distribution of the excess therefore requires that $500 be distributed as a regular distribution.  With only $395 distributed as a regular distribution, $105 of excess remains in your Roth IRAs.

However, if you were eligible to contribute to a Roth IRA for 2019 or 2020 and made less than the maximum permissible contribution, some or all of the excess could have been applied as a part of your contributions for those years.  If you are eligible to contribute at least $500 for 2021 but have already contributed the maximum permissible, you could obtain a return of $500 of your 2021 contribution, adjusted for gain or loss, to make room to apply the $500 as part of your 2021 contribution and eliminate the penalty for 2021.  That would also make the regular distribution unnecessary.

Were you eligible to contribute to a Roth IRA for 2019, 2020 or 2021 and did you contribute the maximum for those years?  That will determine what amendments you need to make.  If you never reported the excess contribution with your 2018 tax return, you'll likely need to amend your 2018, 2019 and 2020 tax returns to include Form 5329.

[rgordon93]

I use Schwab for my RothIRA. They would not allow me to re-characterize my 2018 contribution to a following year. I was able to contribute in 2019,2020, and 2021. I did not make the max contribution in 2019 or 2020 but did make the max contribution for 2021. I did not report the access contribution to my 2018 tax return. I have not cashed the check for the $395, should I cancel this and ask for the full $500 from 2018? 

[macuser_22]

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@rgordon93 wrote:

I use Schwab for my RothIRA. They would not allow me to re-characterize my 2018 contribution to a following year. I was able to contribute in 2019,2020, and 2021. I did not make the max contribution in 2019 or 2020 but did make the max contribution for 2021. I did not report the access contribution to my 2018 tax return. I have not cashed the check for the $395, should I cancel this and ask for the full $500 from 2018? 

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I don't think you understand what a recharacterization is.    It is treating the Roth contribution as if it did not exist and was a Traditional IRA contribution instead.  That must be done before the due date of the tax return.

If yu have an excess contribution then rather than removing it you can apply it a later years contribution if you qualify which it the same as removing it and then using the return money for a new contribution.   Schwab does not do that, you do on your tax return by telling the IRS that the excess was applied to a later year.   That is done in the IRA contribution interview.

[rgordon93]

I’m not an expert and I don’t fully understand. I’d prefer to pull the $500 out, pay the penalty’s and be done with it. My question is once the $500 is out what do I do next and how does this affect my 2018,19,20,21 tax returns

[macuser_22]

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@rgordon93 wrote:

I’m not an expert and I don’t fully understand. I’d prefer to pull the $500 out, pay the penalty’s and be done with it. My question is once the $500 is out what do I do next and how does this affect my 2018,19,20,21 tax returns

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You need to file a 2018, 2019, 2020, and 2021 5329 form with the 6% penalty ($30) for each year.

You can get past years 5329 form here:

https://apps.irs.gov/app/picklist/list/priorFormPublication.html

[tomandjerry1]

This is very clear and helpful.  I made the same mistake and inadvertently made a 2nd $6K contribution to my ROTH IRA in July 2021 which did not get detected since I had switched brokers earlier in the year and failed to recall the earlier $6K contribution.  The error was made in my ROTH IRA at Fidelity and they actually have a form for this error which they'll process to generate the 1099-R.  I have yet to get this form back from them (I only recently detected the mistake while working on my return for 2021 .. so have yet to file).  Based on my reading of the relevant IRS documents, and from discussion with Fidelity,  my IRA trustee will remove the excess $6K plus any earnings in the IRA between the point I made the excess and contribution and its removal which can be attributed to this  $6K  (so, pro-rated based on the total IRA balance between these two time points).  Then these earnings will need to be included as income for 2021 and, lastly, since I'm under 59 1/2 , I will also be assessed a 10% early withdrawal penalty on these earnings. The $6K excess gets removed without being treated as an early distribution.   I'll update this comment once I get the 1099-R from Fidelity. The form at Fidelity is "IRA Return of Excess Contribution Request".

[briolatj]

The distribution gets reported to zero out line 20 section4.

[sf29]

I have a similar situation.  

In July 2021 I made a $6000 contribution to a Traditional IRA for tax year $2021 (there was previous years money already there).

In February 2022 I found I was only eligible to deduct $970.  I should have left the rest in as a non-deductible IRA contribution, but made the mistake of asking fidelity to recharacterize the $5030 to a Roth IRA.  They calculated that the total with gains was $5085 and moved that to a new Roth IRA.  I received a 1099R for the $5085 with code R.  

The account has lost 70% of its value and now only has $1500.  

Since it is past the Oct 2022 deadline, I think I need to withdraw the contribution and pay the 6% penalty.  But is withdrawing the entire $1500 enough?  

Do I need to amend my 2021 return or just report everything on my 2022?

[dmertz]

@sf29 , you did not say if the Roth IRA contribution that resulted from the recharacterization was and excess contribution or not, but if you are married, that would likely be the case.  Otherwise, the Roth IRA contribution probably was not an excess contribution.  I'll assume that it was an excess contribution since you are posting on an old thread about excess Roth IRA contributions

For the $5,030 excess Roth IRA contribution made for 2021, you must file 2021 Form 5329 to report that and pay the 6%, $302 penalty.  You also must include 2022 Form 5329 with your 2022 tax return and either be able to apply some or all of the $5,030 excess as your Roth IRA contribution for 2022 or you must pay a 6% penalty on the lesser of $5,030 or the 2022 year-end value of your Roth IRAs.

To resolve any remaining excess in 2023 when your balance in Roth IRAs is less than the remaining excess, you'll need to take a regular distribution of what remains in your Roth IRAs.  In such a case, the instructions for Form 5329 say to include the entire excess from line 18 on Form 5329 line 20, not just what you took out, eliminating your entire excess.  2023 TurboTax will do this for you when you indicate to TurboTax that you had no Roth IRAs "open" on December 31, 2023.

If your 2021 tax return included Form 8606 showing a $5,030 nondeductible traditional IRA contribution, you must amend to remove that.

[sf29]

@dmertz ,

Thanks for your reply.  You are right that this was an excess Roth contribution.  Your instructions are very clear and appreciated.  

The one last question I have is that even though this Roth IRA dropped in value, I have a Roth IRA at a separate bank that has previous year converted money.  About $10k.

So my plan is to amend my 2021 return to remove the form 8606.  Then file 2021 form 5329 and pay the penalty. 

I would like to take the distribution option of the excess contribution.  Can I withdraw just the balance of that one account where these entire contribution was put and that lost value?  or do I need to remove money also from my separate Roth Account?  

If I withdraw the excess contribution right now, can I avoid paying the 6% fee for this year? 

[dmertz]

I corrected my previous post to reflect that your excess Roth IRA contribution is $5,030, not $5,070.

"I have a Roth IRA at a separate bank that has previous year converted money.  About $10k."

Then you'll have to take distributions totaling the entire $5,030.  This can be taken from your Roth IRAs in any combination because for this purpose all of your Roth IRAs are treated in aggregate as if they were one large Roth IRA.  It might be simplest to take the entire $5,030 from the larger Roth IRA as a single distribution, but that's up to you.

If you are not eligible to apply any of the $5,030 as a 2022 Roth IRA contribution, it's too late to avoid the $302 penalty for 2022 (in addition to the one for 2021) on the $5,030 excess.  To avoid that you would have needed to take the $5,030 regular distribution by December 31, 2022.  Taking that distribution in 2023 eliminates the excess in 2023 and avoids the penalty for 2023 and beyond.

[sf29]

@dmertz ,

I have been working on amending my 2021 return to remove the 8606 and report the excess contribution of $5030, but turbotax is subtracking $970 twice from the $6000.  once as the deductible contribution to the IRA, and then when I put in that $5030 was Recharacterized to a Roth IRA, it is saying that only $970 is allowed so $4060 is the amount of the excess Roth Contribution.  I thought this was wrong, but I tried a couple different ways and turbotax 2021 is doing the same thing.  Am I missing something?  I am married.  I am covered by a 401k but my wife is not.  the IRAs are in her name.

thanks.

[dmertz]

Apparently you are married filing jointly and it is your spouse who is covered by a workplace retirement plan, not you.  In the absence of any taxable income from Roth conversions in 2021, the MAGI limit for deductibility of a traditional IRA contribution is the same as for eligibility to contribute to a Roth IRA.  This means that the amount that you were eligible to contribute to a Roth IRA for 2021 is the same as the amount of traditional IRA contribution for which you were eligible to receive a deduction.  So you do have only a $4,060 excess Roth IRA contribution, not a $5,030 excess contribution.

[ninnh5]

Here is my situation, any help is highly appreciated. 

I finished my 2022 taxes, during the filing on TT, it showed that max my wife and I each could contribute is $3700 in Roth IRA. i completed the taxes in March'23 with the ability to contribute 3700 prior to the tax deadline of April 23. 

then I logged into brokerage accounts to contribute, I realized I contributed 6k to my Roth IRA in Jan 2022 and 6K to my wife's traditional IRA in Jan'22. I followed up with brokerages to withdraw the excess $2.3k from my roth IRA, convert $3700 from my wife's traditional IRA to Roth IRA, and return $2.3k excess contribution.  

There are losses in all these transactions, but the removal of excess (from mine and my wife's) and conversion from Traditional to Roth (for my wife) is completed. Now, How do i handle my taxes? 

- Do i need to amend my 2022 tax returns? (I originally reported only 3.7K roth ira in my return for my spouse and I each)

- How do i handle characterization from Traditional to ROTH, and in which year's tax return? 2022 or 2023? 

Any advice is highly appreciated.