Excess Roth IRA contributions in prior years

[twlja]

My wife has been contributing to a Roth IRA the past few years and not realizing our MAGI exceeds the contribution limits since 2022. (Yes, unfortunate communication mistake between us.) She's working on removing the excess contributions/earnings forms now from the Roth IRA account.

From what we understand, we'll need to file Form 5329 this year with our current taxes and also afterward ammend our prior year tax returns with Form 5329 to deal with 2022~2024 mistake.

Just trying to seek any clarity/confirmation that this would be the correct/best approach. Any other steps being missed? Is the TurboTax interface able to accommodate ammending returns for the prior years or am I best off with a tax account for dealing with this issue for the prior years? Thanks!

[CatinaT1 · Accepted solution]

You can amend your prior year returns with TurboTax, but Form 5329 is actually a stand alone form and can be filled out and mailed in for 2022, 2023 and 2024 avoiding the need to amend. 

For 2025, you have until the April 15, 2026 deadline to do a Return of Excess for any 2025 contributions. You must withdraw the Contribution + Earnings to avoid the 6% penalty for 2025 entirely. You only pay income tax on the earnings (reported on your 2025 return).

For 2022–2024, you have missed the deadline to avoid the 6% penalty for those years. You should not withdraw the earnings for these years. You only need to withdraw the flat contribution amount for that year as a regular distribution.

Since the 6% penalty is already "locked in" for those past years, removing the principal now stops the penalty from repeating in 2026 and beyond. There is no tax or penalty on the withdrawal itself because you are just taking out your own basis.

The 6% penalty is cumulative. For instance if you contributed $6,000 in 2022 and didn't fix it, you owe $360 for 2022, another $360 for 2023, and another $360 for 2024.

You can file Form 5329 as a standalone form. The IRS actually considers Form 5329 to be a "separate return" from your Form 1040.

If your only mistake was the Roth contribution and you have no other changes to your income or deductions for 2022–2024, filing the standalone 5329 is often the "cleaner" and faster path than a 1040-X amendment. But if you want TurboTax to "do the math" for you can certainly do an amendment.

Since you are fixing three years, you will need to handle each one individually. You need to use the specific version of Form 5329 for each year (e.g., the 2022 form for the 2022 penalty). You cannot use a 2025 form to report 2022 taxes. Unlike many other tax schedules, Form 5329 has its own signature and date block on page 2. This is what allows it to live as a standalone document. You should enclose a check or pay via IRS Direct Pay. If paying online, make sure you select the correct year and designate the payment for "Form 5329." Standalone 5329s cannot be e-filed. You must print, sign, and mail them to the IRS service center for your state (the same address where you’d mail a paper 1040).

Because these forms are technically "late," the IRS may eventually send you a bill for Failure to File (Form 5329). Since this is a separate return, there is a penalty for not filing it on time. Interest will accrue on the 6% penalty from the original due date of each return (April 2023, 2024, and 2025). I wouldn't worry about that for now. If the IRS wants to charge you a penalty and interest, you can let them bill you. If the IRS sends you a bill for a "Failure to File" penalty, you can often get it waived by calling and asking for "First-Time Abatement". Note that interest can almost never be waived.

[sanemanmad]

Same exact situation here. Trying to figure out if I should be updating line 10 on the 1040-X (Rev July 2021) to reflect the 6% penalty as net change to other taxes, therefore increasing the total tax owed on line 11. 

[CatinaT1]

If you choose the Form 1040-X route instead of the standalone path, the 6% penalty doesn't have its own dedicated line. Instead, it's part of the total that goes in the Other Taxes category. On Form 1040-X, you will list the penalty on Line 10 ("Other taxes").

Because the 1040-X is a summary form, the penalty actually takes a three-step journey from your worksheets to your final payment:

• Form 5329, Part IV: This is where you calculate the 6% penalty on your Roth IRA excess (Line 25).
• Schedule 2 (Form 1040), Line 8: The penalty amount from Form 5329 flows here, under "Additional Tax on IRAs, other qualified retirement plans, etc."
• Form 1040-X, Line 10: The total from Schedule 2 is entered here in Column C ("Corrected amount").

If you are using TurboTax to do this, you won't actually type on Line 10 yourself.

1. You will go to the "Other Tax Situations" tab.
2. Select "Additional Tax on Qualified Plans (Form 5329)."
3. Once you finish that interview, the software will automatically place that number to Line 10 of your 1040-X for you.

[twlja]

Thank you for  the very informative response. That was super helpful! Especially with regards to not needing to necessarily ammend the prior year returns.

One related question if possible... With this situation, next tax year then am I likely to receive a 1099-R for the redistribution and handle it then on next year's return given the timing of sorting out the matter now with the Roth IRA?

[CatinaT1]

Yes, you will receive a couple of 1099-Rs in 2027 for 2026. One will be for your 2025 Return of Excess Contribution made in 2025. Only the earning will be taxable. You will also receive one that will be reporting your return of contributions from 2022-2024. Since those are returning your original contributions, they are not taxable, but it will be reportable.

[twlja]

Regarding: "For 2025, you have until the April 15, 2026 deadline to do a Return of Excess for any 2025 contributions. You must withdraw the Contribution + Earnings to avoid the 6% penalty for 2025 entirely. You only pay income tax on the earnings (reported on your 2025 return)."

Can you please confirm where this is done within TurboTax? From what I gather it is Deductions & credits > Traditional & Roth IRA Contributions > Roth IRA options.  I see the "recharacterize any of the Roth IRA contributions for 2025 over to a traditional IRA contribution?" which is No as withdrawing the money from the account instead. Filed out the questions over Roth IRA. But not seeing any clear indicator from TurboTax that it's respecting the paying the income tax on the earnings for 2025.  The ending screen for that section is simply "Based on what you've entered you don't qualify for an IRA deduction." without any indicator that it's acknowledged the excess Roth IRA contribution accordingly. So I'm just wanting to make sure TurboTax is handling it properly. Thanks.

[twlja]

@CatinaT1  - I am trying to figure out how to properly report the Return of Excess for 2025 contributions in TurboTax. I wasn't prompted in TurboTax about it. From searching other threads there are some mentions that you can fill out a 1099-R as if you pretended to get one even though it won't be received until next year, can you confirm/clarify? Thanks.

[davetavares]

I see for 2023 there is a form 6329-S and 5329-T.  My wife contributed but had no income (except social security).  We need to fill out the form for a 5000 excess and pay the penalty.

[DaveF1006]

Yes, creating a substitute 1099 R is a recommended procedure for reporting the return of an excess contribution. @twlja 

Yes, you will need Form  5329 to report your wife’s excess IRA contribution since she did not have earned income when she contributed.  @davetavares