Excess IRA Contribution 2018 – Can I apply this to 2019 contribution and not file 2018 amended return?

[TrishaM]

I made a $864 excess IRA contribution in 2018 (in February) because I overestimated my projected self-employment income for that year. I did not know I’d made an excess contribution until I did my 2018 taxes. On April 9, 2019, I took a distribution from my IRA for the excess contribution, plus an additional $2000 (I’m over 59-1/2). I didn’t realize I had to fill out an Excess Contribution Form with my IRA plan administrator. My 2018 Form 5329 shows the $864 excess contribution plus $52 penalty on Lines 15, 16 & 17. I got a 1099-R, treating this as a Normal Distribution in 2019.

Can I apply the $864 toward my 2019 IRA contribution? I’m well under the maximum this year. How do I treat earnings? Is there a way to fill out an Excess Contribution Form in arrears? My plan administrator said they thought not, and to see if a tax person could fix this. I don’t care if I have to pay another $52 penalty, I just want to do this the easiest way possible, and find the amended return process and calculations confusing and overwhelming. Thanks.

[macuser_22]

I am not sure I understand all of the question.

If you had a 2018 excess and removed it before the due date of the 2018 tax return then it is no longer in the account and there is no excess.

You should have had it removed as a "return of contribution" and not a normal distribution.  I assume that this was a Roth IRA and you received a 1099-R with a code J in box 7.  When entering the 2019 1099-R then add the 2018 contribution  to your prior years Roth contribution and it will not be taxed.

Since you paid the penalty in 2018 then the earnings on the excess do not need to be removed.

If the excess is still showing in 2019 then go to the IRA contribution interview and make a 0 Roth contribution and walk through you get to the excess carry forward and zero it out to remove it.

[Edited]

[TrishaM]

This was for a Traditional IRA. I cannot find the "excess carry forward" page in Turbo Tax. Is this the page, in the IRA section, that says "Enter excess amount"? Right now that page has pre-populated with $864. Do I enter zero there? Then, where I enter the amount I contributed to my 2019 IRA (I've already contributed $3000), do I change that to $3864 ($3000 current contribution + $864 carry forward from 2018 excess contribution)?

[fanfare]

you're on the right track but not quite.

you will use a 2019 form 5329 showing 864 excess from last year.

then since you put in less than the maximum allowed for you, you can "resolve" the excess by applying 864 .

(all assuming your income is over 3864).

See Form 5329

unfortunately you owe 6% penalty in 2018 for that excess so you will have to amend your 2018 return to add 2018 5329 and pay up.

doing that will produce the numbers you need for your 2019 form 5329.

Got it ?

[fanfare]

by taking out the money yourself instead of "resolving" it, you incurred a 10% early withdrawal penalty.

[fanfare]

sorry I missed that you already have the 2018 form 5329 . therefor you won't have to amend.

[fanfare]

sorry I missed that you're over 59 1/2 too, therefor there is no 10% early withdrawal penalty.

[macuser_22]

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@TrishaM wrote:

This was for a Traditional IRA. I cannot find the "excess carry forward" page in Turbo Tax. Is this the page, in the IRA section, that says "Enter excess amount"? Right now that page has pre-populated with $864. Do I enter zero there? Then, where I enter the amount I contributed to my 2019 IRA (I've already contributed $3000), do I change that to $3864 ($3000 current contribution + $864 carry forward from 2018 excess contribution)?

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You said "On April 9, 2019, I took a distribution from my IRA for the excess contribution..."  so that $864 is no longer in the IRA, so yes, you enter zero for the pre-populated $864 carry forward excess because it no longer exists - said you removed it.

For the 2019 contribution  you enter the amount contributed in 2019.

[macuser_22]

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@fanfare wrote:

you're on the right track but not quite.

you will use a 2019 form 5329 showing 864 excess from last year.

then since you put in less than the maximum allowed for you, you can "resolve" the excess by applying 864 .

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If the excess was removed on Apr 9, 2019 (plus $2000) then there is no 2019 excess to report on a 5329.   There is also no carry-froward excess from 2018 to apply to 2019 since it was already removed.

(The carry-forward amount that is showing up is because at the time of the 2018 filing, it was not known that the excess would be removed in Apr, of 2019, so it carried forward and simply needs to be resolved by changing that carry forward amount to zero.)

[TrishaM]

In theory, I totally get it. In execution, well... I'm struggling.

On Form 5329, Line 9 - enter excess contribution from 2018 Form 5329. It does not allow me to enter anything there, but  sends me to the IRA Information Worksheet, Line 4. I enter 864 excess contribution there. It does not populate onto 5329, Line 9.

On Form 5329, Line 10 - Enter the difference of contribution limit less contribution: My limit is 6500, I contributed 3000, so I should enter 3500 here. I get a blue box, but can't type anything in here.

So I'm just feeling stuck... Seems like I don't know what to type into which boxes to get this to populate properly.

[TrishaM]

Sent my reply before I saw your latest post. Thank you!

[macuser_22]

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@TrishaM wrote:

In theory, I totally get it. In execution, well... I'm struggling.

On Form 5329, Line 9 - enter excess contribution from 2018 Form 5329. It does not allow me to enter anything there, but  sends me to the IRA Information Worksheet, Line 4. I enter 864 excess contribution there. It does not populate onto 5329, Line 9.

On Form 5329, Line 10 - Enter the difference of contribution limit less contribution: My limit is 6500, I contributed 3000, so I should enter 3500 here. I get a blue box, but can't type anything in here.

So I'm just feeling stuck... Seems like I don't know what to type into which boxes to get this to populate properly.

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You said above:

"This was for a Traditional IRA. I cannot find the "excess carry forward" page in Turbo Tax. Is this the page, in the IRA section, that says "Enter excess amount"? Right now that page has pre-populated with $864. Do I enter zero there?"

That is where you enter the 0 (zero) which should remove it for the 5329 line 9.

If you are in the "forms mode" (which you appear to be) then you can also view the "IRA Information Worksheet" line 4 that should have the 2018 carry forward $864 excess, and enter a 0 (zero) which should do the same thing.  Once the carry-forward excess is gone the 5329 should also go away.

[fanfare]

@TrishaM  according to your post which I think the others are misreading, you took a distribution, not a removal of excess (which requires an earnings calculation).

distributions don't cancel out contributions.

You also said you don't want to amend 2018.

After you, as I described, resolve the excess with 2019 Form 5329 by applying some of your allowed 2020 contribution, and even if you don't , you can recontribute the 854 as a 2020 contribution.

Then you will be free and clear except for the 6% penalty which can't be recovered.

Sorry to see you are getting conflicting advice.

[macuser_22]

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@fanfare wrote:

@TrishaM  according to your post which I think the others are misreading, you took a distribution, not a removal of excess (which requires an earnings calculation).

distributions don't cancel out contributions.

You also said you don't want to amend 2018.

A distribution as much as (or more) the excess *is* removing the excess.   You are NOT required to remove both the excess AND the earnings in order to remove the excess as long as the 6% penalty is paid (as it was) as long as the excess is removed with a normal distribution.

[Some taxpayers actually do this on purpose when the earnings on the excess exceed the 6% penalty.  As long as the earnings  make more than the penalty they just leave it in the IRA and pay the 6% every year.]

You are misinterpreting the rules   A "return of contribution" distribution requires that both the contribution AND earnings must be removed before the due date of the return.   If that was done then only the earnings would be taxable income.   Failure to do that will result in a 6% penalty in the year of the contribution and each year thereafter until the excess is removed.     The excess must still be removed, but with a normal distribution - the earnings can remain in the IRA because the 6% penalty was paid.

In this case, the OP did not remove the excess and earnings as a return of contribution to avoid the 2018 6% penalty, but did remove the excess as required to stop the 2019 6% penalty, therefore, since the penalty was paid, any earnings can remain in the IRA.

[fanfare]

OK I'll take your word for it.

Separately

"but did remove the excess as required to stop the 2019 6% penalty, therefore, since the penalty was paid, any earnings can remain in the IRA."

There was a big discussion on this point a few years ago. As I recall

the upshot was the earnings *cannot* remain in the IRA (it was Roth not Traditional if that makes any difference), 

I'm glad to hear now that I must be mis-remembering  the conclusions reached in that thread (which has been deleted).