Excess Roth contribution - Penalty, lost, interest and distribution

[Happylala]

1. In 2012, I open a Roth IRA at the bank and deposit /contribute $16,500 in a mutual funds account. It was $5,000 Roth contribution limit in 2012. I didn't know the rule at that time.

2. In 2018, 2020 and 2021, I made full contributions in those years: $6,500 in 2018, $7,000 in 2020 and $7,000 in 2021. I exceeded the income limit for contributing to Roth IRA. Last year, on April 17, 2024, I made a distribution for 2018, 2020 and 2021 total of $20,500 without the distribution with lost and earnings. How to deal with the lost and earnings? I am over 59 1/2 years old to make the distribution at that time.

3. Getting ready for 2024 Tax Return.
I received 1099-R from 2018, 2020 and 2021 distribution to report in the Tax Return. How to calculate the penalty? What about the lost and earning? I am trying to avoid additional late charges.

How to deal with 2012 excess Roth contribution? I know I must make the distribution for 2012. What is the distribution amount to notify the bank? Is it today's ending balance with the 13 years (2012-2025) interest, dividend and lost? In other words, should I close the Roth IRA account? What is the Roth distribution amount?

In addition, how to calculate the penalty? Lost and earnings?

Thanks in advance!

[DanaB27]

When removing an excess contribution after the extended due date you will only have to remove the the excess contribution without the earnings or losses. So you still need to remove the $11,500 excess contribution from 2012 (assuming you were allowed to make the $5,000 contribution for 2012).

You will have to pay the 6% penalty on the $11,500 excess contribution each year this was in the account so from 2012 to 2024 (assuming you weren't able to apply the excess in the following years). You use Form 5329 for each year to calculate it. Please see Prior Years Form 5329 to search for each year.

If you haven't paid the 6% penalty for the 2018, 2020, and 2021 excess then you will still have to pay the penalty for those too.

Assuming you weren't allowed to apply the excess as a Roth IRA contribution to any of the following years:

For 2012 to 2017 you pay $690 each year on the $11,500 excess (if your balance was smaller that $11,500 at the end of the year then you will only pay 6% x the balance on December 31, 20XX).

For 2018 you will have $18,000 excess contribution and need to pay $1,080 (if your balance was smaller that $18,000 at the end of 2018 then you will only pay 6% x the balance on December 31, 2018).

For 2019 you pay $1,080 on the $18,000 excess.

For 2020, you pay $1,500 on the $25,000 excess.

For 2021 to 2023 you pay $1,920 each year on the $32,000 excess.

For 2024 you pay $690 on the $11,500 excess. 

If you remove the rest of the excess by the end of 2025 then you do no longer pay the 6% penalty.

Please see How do I amend my federal tax return for a prior year?

On your 2024 return you will enter the Form 1099-R with code J for the distribution of the 2018, 2020, and 2021 excess:

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen (include your excess contributions here)
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution ($32,000).

[Happylala]

DanaB27,

This is very helpful. Unfortunely, the ending balance is more than $11,500 for 2012. It was around $17,350 in 12/2012. 2013, ending balance in 12/2013 was around $21,550.  In 12/2018, ending balance was $39,381. How to calculate if the December 31, 20XX balance more than the excess amount?

[DanaB27]

The penalty is calculated by using the smaller of total excess contribution  (line 24 of Form 5329) or the value of your Roth IRAs on December 31, 20XX. Therefore, the 6% penalty for 2012 would use the total excess contribution amount of $11,500 and my previous instructions would still apply.

[Happylala]

Thank you. I will make the distribution for 2012 on Monday. Will I receive 1099-R before April 15, 2025 to file the 2024 tax return or file it next year? 

For 2012, 2018, 2020 and 2021 excess Roth contributions, do I need to amend the tax in those years?

[DanaB27]

You will receive a 2025 Form 1099-R next year and this will we entered next year on your 2025 tax return.

Yes, you will have to amend years 2012 to 2023 if you did not pay the 6% penalty when filed the original returns. 

Form 5329 Instructions state: "Prior tax years. If you are filing Form 5329 for a prior year, you must use the prior year's version of the form. If you don’t have any other changes and haven’t previously filed a federal income tax return for the prior year, file the prior year's version of Form 5329 by itself (discussed earlier). If you have other changes, file Form 5329 for the prior year with Form 1040-X, Amended U.S. Individual Income Tax Return."

Please see Prior year forms and instructions to search for prior year Form 5329 and Form 1040-X.

Please see Taxpayer Advocate Service for additional information.

[Happylala]

Thank you for all your help!