Excess Roth IRA contributions

[chasfiii]

My wife and I are both 74.  In March of 2021 we each contributed $4000 to our respective Roth IRA for the 2020 tax year.  We subsequently discovered that our contributions were not allowed because we had no "earned income" in 2020. The excess funds were not withdrawn prior to filing our 2021 taxes so we are aware that we will owe the 6% penalty.  The funds and the earnings were distributed in February of 2022.  What steps to we need to take tax wise to correct this situation.    #1. Are the earnings reported in an amended 2020 tax return or on our 2021 tax form.   I'm confused since I have read that the earnings are taxable "in the year the contribution was made".  the contribution was made in 2021 for the 2020 tax year. 

#2 Is the form 10099R made for 2020 or 2021.  

[MarilynG1]

Per Champ @DJS:

"There are several ways to correct an excess contribution to an IRA.

• Withdraw the excess contribution and earnings. In general, you can avoid the 6% penalty if you withdraw the extra contribution and any earnings before your tax deadline. You must declare the earnings as income on your taxes. 
• File an amended tax return (if you’ve already filed). You can avoid the 6% penalty if you remove the excess contribution and earnings and file an amended return by the October extension deadline.
• Apply the excess to next year’s contribution. Doing this on a future tax return won’t get you off the hook for the 6% tax this year, but at least you’ll stop paying once you apply the excess.
• Withdraw the excess next year. If you don't do one of the other options first, you can withdraw the excess funds by Dec. 31 of the following year. You can leave the earnings in, but you must remove the entire excess contribution to avoid that 6% penalty for the following year"

If you choose to Amend your already-filed 2021 return and add the 2022 1099-R (year funds were withdrawn) with Codes J,P in Box 7, and Earnings in Box 2a, you don't need to Amend your 2020 return also. 

[chasfiii]

My 2021 return has not been filed. The Roth contribution was made in March of 2021 for the 2020 tax year.  The excess contribution and earnings were withdrawn in February 2022. Can all of that info be included on my 2021 tax return or should I wait until I file my 2022 return next year? When do I file the 6% penalty.? 

[DanaB27]

You will include the distribution and earnings on your 2022 tax return since it was withdrawn after the due date of the 2020 tax return it is a regular distribution. You will get Form 1099-R for the distribution next year. For future references, when an excess contribution is withdrawn after the due date then you can leave the earnings in the account.

You will have a 6% penalty on your 2020 and 2021 tax returns. The penalty on your 2020 tax return will be automatically calculated when entering the excess IRA contributions under Deductions & Credits and you get the penalty waring.

For your 2021 tax return, you will go through the IRA contribution interview and enter your excess contribution from the prior year (verify it is correct if it got carried over):

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Continue until "Do You Have any Excess Roth Contributions" screen and answer "Yes"
6. Verify/ Enter the amount on the "Enter Excess Contributions" screen

[chasfiii]

I am still confused. My 2021 tax return has not been filed. The excess has been withdrawn. Why would I owe the 6% for 2020 and 2021.  

[DanaB27]

To avoid any penalty for an excess 2020 contribution you would have to withdraw the excess plus earnings by the due date of the 2020 tax return (including the extension if you filed one which gets you to October 15th, 2021).

But you did not withdraw the excess until February 2022 and therefore you will have to pay the penalty for 2020 and 2021.

"Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA." (IRS)

[chasfiii]

I'm working on my 2021return. I worked thru the Roth contribution section and entered the excess amounts contributed to our 2020 Roth IRA's. My taxes due increased by 6% which I am assuming to be the penalty. I don't get any warning nor do I see a place to show that the excess was returned. also, I am not directed to the form 5329. What am I missing? 

[DanaB27]

On your 2021 return, there will be no warning page and you do not enter that you removed the 2020 excess contribution. On your 2022 return, you will make sure that on "Enter Excess Contributions" screen (from prior years) $0 or blank is entered.

TurboTax should automatically fill out Form 5329 when you enter that you had excess contribution from prior years.

[chasfiii]

I appreciate your help and I think I'm getting closer to understanding what I need to do.  So, the Form 5329 for 2021 does not get generated on my 2021 taxes?  The Form 5329 will be generated when I do my 2022 taxes? The initial 6% penalty for not withdrawing is paid when I file my 2021taxes?     

If the above are correct, Am I good until I file my 2022 taxes?

[DanaB27]

No, you should have Form 5329 on your 2021 tax return

But you need to make sure to remove the excess contribution from 2020 on your 2022 tax return. If it is carried over to your 2022 return then make sure to remove it when you file the 2022 return next year (maybe set a reminder in your phone for tax time).

You will have the pay the 6% for 2020 and for 2021. If you haven't paid it for 2020 because it wasn't included on your 2020 tax return then you will have to amend your 2020 tax return. Please check Form 5329 line 25 and Schedule 2 line 6 on your 2020 tax return.

To get TurboTax to create Form 5329 on your 2021 tax return:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Continue until "Do You Have any Excess Roth Contributions" screen and answer "Yes"
6. Verify/ Enter the excess contribution amount from 2020 on the "Enter Excess Contributions" screen

[chasfiii]

Okay, I have a Form 5329T (self) and a Form 5329S (spouse) on my 2021 return. Part IV of the forms are filled in based on the info I entered on the 2021 form as to excess contributions in prior years. The amounts were self- generated from the 2021 information and is shown as 2020 excess contribution, although it did not come from a 2020 Form 5329.   Also, Schedule 2 ( 2021 Form 1040 ) line 8 includes the 6% tax due. 

I tried to amend my 2020 return, but it asks for excess contributions in 2019 or prior and it won't let me enter information directly into the Form 5329.  Looks like I will pay the 6% fee on 2021 and 2022 taxes.  Am I still missing something? 

[DanaB27 · Accepted solution]

Yes, you will pay the 6% penalty for 2020 and 2021.

It seems you have entered everything correctly on your 2021 tax return.

On your 2020 tax return you will only enter the total 2020 contribution you made (for you and you spouse), leave the "excess contributions in 2019 or prior blank" and when you continue you should get a warning about the penalty at the end. You will just click continue ant TurboTax will create Form 5329 for you.  

[CoachKristine]

@DanaB27  - this has been an informative thread. I have a similar situation. Hoping you can verify the below are the correct action steps. 

In calendar 2020, $7000 Roth IRA contributions were made (age > 50+).  In January 2021, an additional contribution of $3500 was made (in error) to the same 2020 Roth IRA, now causing a total of $10,500 in 2020 contirbutions.  The tax return was filed. 

Calendar year 2021, only $3500 in Roth IRA contributions were made to 2021 Roth IRA. 

In March 2022, the error was discovered.   The 2021 tax return is in prep mode, it has not yet been filed.

This is what I have done so far to correct the error.  Does the following seem correct or am I missing something?

1. contacted broker and have removed the excess $3500.  When the check arrives, I'll turn around and make a $3500 Roth IRA contribution in March 2022 for a calendar 2021 contribution to equal $7000 total contributions for age 50+. 

2. I returned to TT desktop 2020 and have created an amended 1040X return, including F5329 showing the $3500 as removed on line 25 and generating a $210 penalty showing on Schedule 2.   (first year of excess)  This return will be paper filed.  There were a couple other corrections made still resulting in an overall add'l refund.

3. In TT 2021 I opened up Personal>Deductions & Credits> Do you have any Excess Roth Contributions... in 2021 or any previous year?  yes> enter $3500> enter YE 21 value of Roth.   

This creates F5329 for 2021 tax return,

• line 18 $3500 excess cotnribution form line 24 of 2020 F5329.   
• Line 21 $0. 
•  Line 22 $3500 for 'prior year excess contributions' 
• Line 23 - blank  (appropriate since no excess 2021 contributions)
• line 24 - $3500 for 'total excess contributions'  
• line 25 - $210 penalty.   (second year of excess was calendar  year 2021)  

total penalties = $420 

Next year in 2023 when I create my 2022 tax return, there will be no more penalty because the excess was removed prior to the due date of the return 4.18.22. 

The 1099R codes 'should' catch up with the F5329s and code P or 8 (?) should make it 'ok'  I hope.  

Does all this sound correct?  am I leaving anything out?  

Best to paper file this return too? or would e-file still be a good option?

TIA!

[DanaB27]

Yes, entered everything correctly.

Yes, next year you will no longer have a penalty because you removed the 2020 excess before December 31, 2022. Did you request just a regular distribution without earnings since it was after the due date of the 2020 tax return? 

Yes, when you enter your 2022 Form 1099-R then it will cancel out the excess contribution in 2022.

You will have to mail the amended 2020 tax return, but you can e-file your 2021 tax return.

@CoachKristine

[Mike9241]

it's not only the excess you need to remove but also any earnings thereon. earnings left in on excess contribution are also subject to penalty.