Correcting Roth IRA excess contributions for 2020 and 2021

[alec91]

Starting in 2020 my salary exceeded the limit where I could contribute to a Roth IRA, but I wasn't aware there was a limit, so I kept contributing the max yearly. In December when I noticed the problem, I was able to re-characterize my 2022 contribution, but my 2020 and 2021 contributions will be much more challenging. In December I asked my brokerage (Vanguard) to remove the excess $12,000 from my Roth. This year I have a 1099-R for the removed $12,000 with a distribution code J.

I realize I will need to pay a 6% penalty on the excess per year (so here, 6000x6% + 12000*6%x2 = $1,800). What I'm unclear on is how to enter this in turbotax. Will it be necessary to file three form 5329s for 2020, 2021, and 2022, or can I calculate the penalty for all three years and file on one 5329 for 2022? Could I do this independently from filing this year's full return? And will I also have to amend my 2020 and 2021 returns?

In addition, I am unclear if I will need to pay an additional 10% penalty on this $12k distribution. I thought this wouldn't be necessary since it is correcting an earlier error, but if this is wrong, how do I enter the 10% tax in turbotax too or otherwise pay the 10% tax manually? And would the 10% apply to the principal or just to the gain?

[DanaB27]

Yes, you will have to pay the 6% penalty for the 2020 and 2021 excess. Yes, you will need to file a 2020 and 2021 amended return.

No, you don't have to pay the 10% early withdrawal penalty on the Roth distribution since you didn't withdraw any earnings. make sure you enter your net contributions in the follow-up questions.

On your 2020 return, all you need to do is enter the Roth contribution and TurboTax will automatically calculate the 6% penalty on Form 5329.

On your 2021 return, you will have to pay the 6% penalty for the 2020 and 2021 excess contribution:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter your 2021 contribution
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020.

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

On your 2022 tax return, you will enter your From 1099-R with code J to show that you removed the 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 2022 (include the 2020 and 2021 excess contribution) on the "Enter Prior Year Roth IRA Contributions" screen
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 and 2021.