Had an excess traditional IRA contribution for 2018 and withdrew in 2020. Help needed for 2019 tax filing

[haha666]

Hello,

I had an excess traditional IRA contribution for 2018. TurboTax generated Form 5329 and paid the 6% penalty for 2018 tax return. I realized the excess IRA contribution when I'm filing my 2019 tax return. I requested a withdrawal of the excess amount of $2,000 and received $1,950 on April 20, 2020.

In TurboTax, to the Question -

Excess Contributions Withdrawn

Did you withdraw any excess contributions made to a traditional IRA after the due date (including extensions) of last year’s return?

My answer should be YES. And then TurboTax removed 6% penalty on the excess IRA contribution.

Am I right?

Thanks!!

[macuser_22 · Accepted solution]

No.  Not correct.   The 6% penalty repeats every year until removed.    Since the excess was still in the account on the last day of 2019 then you must pay the penalty again for 2019.

When you file your 2020 tax return next year in 2021 then tell TurboTax that the excess has been removed and yiu will not owe another 2020 penalty.

[haha666]

So, the question in TurboTax should change to -

Excess Contributions Withdrawn

Did you withdraw any excess contributions made to a traditional IRA after the due date (including extensions) of last year’s return and before/on the last day of last year?

Otherwise, the withdrawal after due day (including extensions) of last year’s return could also happen any day in Year 2020 before submitting 2019 tax return. 

Correct?

Thanks!

[macuser_22]

---

@haha666 wrote:

So, the question in TurboTax should change to -

Excess Contributions Withdrawn

Did you withdraw any excess contributions made to a traditional IRA after the due date (including extensions) of last year’s return and before/on the last day of last year?

Otherwise, the withdrawal after due day (including extensions) of last year’s return could also happen any day in Year 2020 before submitting 2019 tax return. 

Correct?

Thanks!

---

No.  Last years return was 2018 and you had until April 15, 2019 (or Oct 15 2019 if you filed and extension) to remove it.   After that it is subject to the 6% penalty.   You did not have until the end of 2019 to remove it AND and earnings attributed to the excess.

Now, for 2019 tax, since the 6% 2018 penalty was paid,  you no longer have to remove the earnings, only the excess and you had the entire 2019 calendar year to do that not just to the due date, since that was not done, the you owe another 2019 6% penalty.   To avoid another 2020 you have the entire 2020 calendar year to remove it.

The "by the due date" only applies to the year that the contribution was for, not subsequent years.   TurboTax is correct.

[haha666]

The question in TurboTax is -

Excess Contributions Withdrawn
Did you withdraw any excess contributions made to a traditional IRA after the due date (including extensions) of last year’s return?

Yes No

That "after" could be any day in 2019 after the due day of 2018 tax return OR in 2020 before 2019 tax return filed. 

TurboTax's question is not clarifying the withdrawn done in 2019 or in 2020. 

Answering "Yes", no 6% penalty, while "No", 6% penalty.

Cconfused. Please Help!

Thanks!

[macuser_22]

The "due date" for the 2018 excess was April 15, 2019.    After that you will owe the 2018  penalty on your 2018 tax return.

The due date for the 2019 tax return is immaterial.    ANY date is *after* the due date of the year that the excess was for, which was 2018 and that was due date was April 15, 2019.    If not withdrawn  by the end 2019 then you also owe another 6% penalty for the 2018 excess still in the account.

As I said above, the "due date" ONLY applies to the tax year that the excess was *for*.   In subsequent years ithe last day to remove without another penalty for that year is Dec 31 of that tax year.

[haha666]

As I didn't withdrew the excess by April 15 (or Oct 15), 2019, I paid 6% penalty on my 2018 return. Per your response, in subsequent years, the last day to remove without another penalty for that year is Dec 31 of that tax year.

To determine whether the 6% penalty should be imposed on 2019 tax return, the question in TurboTax should change to -

Excess Contributions Withdrawn

Did you withdraw any excess contributions made to a traditional IRA after the due date (including extensions) of last year’s return and before/on Dec. 31, 2019?

Yes No

It's clear, this way, that any excess not removed by Dec 31, 2019, will need pay 6% penalty.

Thanks!