topic Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues in Retirement tax questions

Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

ykh224 — Tue, 24 Feb 2026 08:19:42 GMT

Hello TurboTax Community,

I'm facing a couple of issues with my Roth IRA transactions and would really appreciate your guidance:

1) Indirect Roth IRA Rollover Issue: I transferred $6,000 from my Roth IRA at Brokerage A to a Roth IRA at Brokerage B in 2022. This was done by withdrawing the funds to my checking account, and Brokerage A coded this as an early distribution. I've spoken with them, and they advised me to coordinate with Brokerage B and complete the necessary tax forms to properly account for this as a 60-day indirect rollover. Could you advise on the specific forms or steps I need to take to ensure this is correctly reported?

2) Retroactive Roth IRA Contributions: My son made contributions to his Roth IRA for previous years (since 2019) during a period when he was not eligible to contribute. What steps should we take to address this issue and ensure compliance with IRS rules?

Any insights or advice on how to handle these situations would be greatly appreciated. Thank you in advance for your help!

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

Opus 17 — Wed, 20 Dec 2023 13:05:26 GMT

1. Broker B reported the money to you and the IRS on a form 5498 that was probably issued in May, 2023. Do you have a copy of this form? Did broker B record this transaction as a regular contribution (box 1) or as a rollover (box 2)? When you deposited the money at broker B, did you tell them in advance that this was a rollover or were you silent, so they assumed that it was a regular contribution?

If broker B reported this as a contribution, you need to ask them to issue a corrected form 5498 to report it as a rollover. If you did not tell them in advance that it was a rollover, they may be unable to make the correction, because they may be required to assume it is a contribution unless told otherwise. If the transaction is already reported in box 2 as a rollover, then what is your problem?

2. Non-allowable contributions must be removed or the taxpayer must pay a penalty on each tax return after the non-allowable contribution. Can you provide more details about what contributions were made in which years, and why he was ineligible.

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

ykh224 — Wed, 20 Dec 2023 18:34:12 GMT

Thank you for the speedy reply!

1. Regarding the Roth IRA rollover:
- I did receive a Form 5498 for 2022 from Broker B. It lists the amount under "Roth IRA Contributions" (line 10), indicating it was recorded as a regular contribution, not a rollover.

2. About the non-allowable contributions:
- My son made contributions in the years he didn't have sufficient earned income, making them non-allowable.
- I spoke with a representative over the phone at Broker A, and they suggested that working with a tax professional to communicate with the IRS might help mitigate or minimize any penalties. Do you think this approach could be effective or is he doomed to pay the penalties?

I appreciate your help 🙂

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

Opus 17 — Wed, 20 Dec 2023 19:47:52 GMT

Regarding #1,

If you can get broker B to accept your explanation that this was a rollover, and get them to issue a corrected form 5498, that should alleviate any issue you have with the IRS. Did you also make contributions, meaning that the IRS now thinks you have excess contributions for 2022? If you can't get the 5498 corrected, you will likely have to pay a penalty for 2022 and then remove the excess to avoid future penalties.

Regarding #2,

I am going to recruit @dmertz to discuss your options regarding your son's Roth IRA contributions.

As I understand the regulations:

1. For 2019, your son has an excess contribution and needs to file an amended return to pay a 6% penalty on the excess contribution. (Note that statute of limitations is 3 years from the date he filed, or 3 years from the filing deadline, but there is no statute of limitation if he didn't file a tax return. If he did file a 2019 tax return on time, and didn't pay the penalty, and the IRS has not sent an adjustment notice, you might get away with not correcting the error. You may want to back that up with your own professional advice.

2. Going forward, did your son at any time have compensation from working, and did he continue to make Roth IRA contributions? He can use his present eligibility to "use up" prior excess contributions. For example, suppose that in 2019, he contributed $3000 but had no compensation from working. In 2020, he had $10,000 in compensation from working and contributed $5000 to a Roth IRA. Because the 2020 limit was $6000, $1000 of the prior excess is absorbed by the unused 2020 limit, so on his 2020 tax return, he would report and pay a 6% penalty on only $2000 of excess. However, if he did not have compensation from working, then any contributions were not eligible, and if he had compensation but contributed the full $6000, there is no extra room that can absorb the prior excess.

3. Your son needs to recalculate his excess Roth IRA contributions for 2020, 2021 and 2022, and prepare amended tax returns that include a penalty calculation on form 5329. Based on his contributions, and his compensation, the excess might be constantly increasing, or it might be decreasing. Whatever the excess is, is assessed a 6% penalty. It is too late to make any corrective distributions or withdrawals for 2019-2022.

(For example, your son contributed $6000 in 2019 with no compensation. The excess for 2019 is $6000 with a 6% penalty. Your son contributed an additional $6000 in 2020 with no compensation. The excess for 2020 is $12,000, subject to a 6% penalty. Your son contributed an additional $6000 in 2021 and had $4000 of compensation from a small job. The excess for 2021 is $14,000, subject to a 6% penalty. And so on.)

Also note that if he files amended returns for 2019-2022, reporting that he owes additional tax due to the 6% penalty, the IRS will likely come back and ask for interest because he is paying his taxes late. It's a variable APR, around 4-7% depending on the month.

4. For 2023, if your son withdraws his current amount of excess contributions before December 31, there will be no additional penalties calculated on the 2023 return. The penalty is based on the amount of excess contributions in the account as of the end of the year, so if he withdraws them, there is no further penalty. But this also needs to be reported and calculated in the tax program on form 5329.

Withdrawal of Roth contributions is never taxable. Withdrawal of earnings is taxable before age 59-1/2, but there is no need to withdraw earnings here. Suppose your son made full contributions for 2019-2023 that were all considered excess, that's $30,000. And suppose the account balance is currently $36,000 due to market growth. He only needs to remove the $30,000 that is considered excess contributions--and this is non-taxable--and he can leave the earnings to grow. (But, you need to prepare the amended returns for 2019-2022 so you know what the excess will be in 2023.) If he also withdraws the earnings, they are subject to income tax plus a 10% penalty if under age 59-1/2.

(And of course, in this example, any earnings that can be left in the account will be offset by the accumulated 6% penalties.)

Can you reduce the penalties by hiring a professional to negotiate a lower amount with the IRS? I don't know. My guess is the amount your son will owe won't be large enough that you can entice the IRS with an offer in compromise. But it's up to you if you want to try.

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

dmertz — Thu, 21 Dec 2023 00:42:46 GMT

The IRS does not have any authority to waive excess-contribution penalties. The exact amounts of excess contributions made for 2019 through 2022 will need to be distributed from your son's Roth IRA(s) before the end or 2023 to avoid another 6% penalties on these on 2023 Form 5329. These will be nontaxable distributions of contribution basis.

Your son has until the due date, including extensions, to obtain a return of contribution of an 2023 excess contribution, with the amount distributed adjusted for investment gain or loss, to avoid any penalty on the 2023 excess contribution. The 2023 excess contribution returned in this way will be treated as not having been contributed.

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

ykh224 — Mon, 25 Dec 2023 02:04:24 GMT

Hi again,

I have to say, I really appreciate you guys for taking the time to help me out with this mess. I've consulted with a local tax professional and was told that in addition to filling a form 5329 for each year that I made excess contributions I should also be completing a form 8606, though I'm still in talks, and unsure why this form is relevant for my situation.

For 2023: Excess Contributions

Son:
- Withdraw all excess contributions before December 31, 2023 to avoid additional penalties.
- Complete an IRA Return of Excess Contribution Form with Broker B.
- Complete form 8606 for the year he does the withdrawal.

For 2022: Excess Contributions & Indirect Rollovers

Me: Corrected Form 5498 form Broker B to indicate an indirect rollover instead of a new contribution.
Son: If withdrawing excess contributions for 2022, does he still need to follow the same procedure as me?

For 2019-2021: Excess Contributions

Son: Withdraw the excess contributions and complete Form 5329 with Broker A (Fidelity).

I had a call with a representative from Broker A (Fidelity), he mentioned that Forms 5329 should be completed in-house with the brokerage.

Are there any additional steps or considerations I might have missed?

Thanks again for everything, wishing you guys and your families a Merry Christmas.

Re: Need Guidance on Indirect Roth IRA Rollover and Retroactive Contributions issues

dmertz — Mon, 25 Dec 2023 05:13:27 GMT

Nothing about your son's the returned 2023 contribution goes on Form 8606. The returned 2023 contribution is treated as never having been contributed. Any gains required to accompany the returned 2023 contribution, shown in box 2a of the Form 1099-R, will be includible on 2023 Form 1040 line 4b.

I assume that your son is under age 59½. The excess contributions made for 2019 through 2022 added to his contribution basis, so the regular Roth IRA distribution of an amount equal to these excess contributions will be a nontaxable distribution of contribution basis, calculated on his Form 8606 Part III (2023 Form 8606 assuming that the distribution is completed by December 31, 2023). This distribution will also appear on his 2023 Form 5329 line 20, eliminating the excess.