How to file tax when I did exceed Roth IRA withdrawal

[huanyis]

I contributed $6000 in 2021 Jan for the 2020 tax year Roth IRA, however, when filing tax for 2020 I forgot to include this. 

In early 2022, when I was filing tax for 2021, I realized that I have exceeded the income limit for contributing to the Roth IRA in 2020. Therefore I called my financial advisor to withdraw that amount in early April 2022. And in the meanwhile, I filed an extension for the 2021 tax. 

Now my question is: my financial advisor said, the 1099R would not be sent this year, but would be sent for filing for the 2022 tax year. In this case

1. Should I report it in my 2021 tax filing? If yes, how should I do it?

I noticed if I report the exceeded contribution for the 2021 tax, it would generate a 6% penalty. And in the meanwhile, Turbotax asked me to amend my 2020 tax filing, which would generate another 6% penalty of $360. I wonder why I need to pay the penalty for two years. 

I read some posts that said:  amended for 2020, and if has withdrawn the exceeded amount + earnings before the 2021 tax deadline, I should put 0 for the question about the exceeded Roth IRA in previous years. So the penalty would only be one year in my case. 

2. When I receive the 1099R for 2022 filing, how should I report that? Would that generate a penalty again?

Thank you 

[macuser_22]

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@huanyis wrote:

I contributed $6000 in 2021 Jan for the 2020 tax year Roth IRA, however, when filing tax for 2020 I forgot to include this. 

In early 2022, when I was filing tax for 2021, I realized that I have exceeded the income limit for contributing to the Roth IRA in 2020. Therefore I called my financial advisor to withdraw that amount in early April 2022. And in the meanwhile, I filed an extension for the 2021 tax. 

Now my question is: my financial advisor said, the 1099R would not be sent this year, but would be sent for filing for the 2022 tax year. In this case

1. Should I report it in my 2021 tax filing? If yes, how should I do it?

I noticed if I report the exceeded contribution for the 2021 tax, it would generate a 6% penalty. And in the meanwhile, Turbotax asked me to amend my 2020 tax filing, which would generate another 6% penalty of $360. I wonder why I need to pay the penalty for two years. 

I read some posts that said:  amended for 2020, and if has withdrawn the exceeded amount + earnings before the 2021 tax deadline, I should put 0 for the question about the exceeded Roth IRA in previous years. So the penalty would only be one year in my case. 

2. When I receive the 1099R for 2022 filing, how should I report that? Would that generate a penalty again?

Thank you 

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Since this was a 2020 contribution then nothing goes on your 2021 tax return. 

You must amend 2020 and show the excess in the Roth IRA contribution interview which will produce a 5329 form with the 6% penalty.

Since that penalty repeats each year until removed and it was not removed before the end of 2021, another 6% penalty applies to 2021 that would be reported the same way.

Since it was removed in 2022 there is no 2022 penalty - you just report the 2099-R when it comes.  There will be no 2022 tax since you just removed your own contribution.

[SundayInSalem]

Excess Roth contributions are taxed at 6% per year for each year the excess amounts remain in the IRA.

You owe the 6% penalty for 2020 because you did not withdraw the excess by the due date of the 2020 return (including extensions).

File an amended 2020 return to report the excess contribution and penalty.

How do I amend my 2020 return?

You can avoid the 6% penalty for 2021 by withdrawing the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and any income earned on the excess contribution.

See Tax on excess IRA contributions in Retirement Topics - IRA Contribution Limits.

Report your 2022 1099-R as an IRA distribution. There is no penalty because this is a distribution; not a contribution.

[macuser_22 · Accepted solution]

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@SundayInSalem wrote:

You can avoid the 6% penalty for 2021 by withdrawing the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and any income earned on the excess contribution.

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The extended due date only applies to excess contributions for the tax year for which the contribution was made - 2020.   Subsequent years are calendar years so the excess had to be removed by Dec 31, 2021 which it was not, so the penalty applies

[Mike9241]

based on IRS publication 590A

1) the excess from 2020 can not be applied to 2021 to avoid the 2021 penalty because the IRS only allows this if it is not in excess of the allowable contribution.

"If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year"

2) the income withdrawn is taxable in 2021.

The earnings are considered earned and received in the year the excess contribution was made.

from other sources

a) The withdrawal of contributions is tax free, but you must include
the earnings on the contributions in income for the year in
which you made the contributions.

notice it says "in which" not "for which"

b)Earnings are considered earned and received in the tax year during which the excess contribution was made.

[macuser_22]

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@Mike9241 wrote:

based on IRS publication 590A

1) the excess from 2020 can not be applied to 2021 to avoid the 2021 penalty because the IRS only allows this if it is not in excess of the allowable contribution.

"If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year"

2) the income withdrawn is taxable in 2021.

The earnings are considered earned and received in the year the excess contribution was made.

from other sources

a) The withdrawal of contributions is tax free, but you must include
the earnings on the contributions in income for the year in
which you made the contributions.

notice it says "in which" not "for which"

b)Earnings are considered earned and received in the tax year during which the excess contribution was made.

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Your #2 point is incorrect.   You overlook that the excess was not removed until 2022.  Also your point #1 is moot since the excess has already been removed in 2022.  (It could have been applied to a 2022 contribution had it not been removed and income limits allowed a 2022 contribution).

The earnings are only removed IF it was a return of contribution before the due date (or extended due date) of the tax return for the year that the contribution was *for*.  In that case that was 2020 so that section of Pub 590A does not apply.   The section that does apply is "excess not removed by due date" so the 6% penalty does apply but there is no requirement to remove the earnings that stay in the IRA.   Paying the 6% penalty allows the earnings to stay in the account.     590A only mentions removing the earnings if done *before* the due date (or extended due date.)

[huanyis]

Thank you. I understand now.