Excess Roth Contribution creating perpetual amendments?

[naviator2003]

Okay tax gurus. This one's for you!

I had excess Roth IRA contributions for 2020 ($2,020). I removed the excess contributions, and the gains before the tax deadline in 2021. I received a 1099-R in 2022. I was instructed by Turbotax to file an amended return for my 2020 taxes (because the gains from the excess contribution have increased my AGI for 2020). I am in the process of amending my 2020 return in Turbotax. I added the 1099-R (that has 2021 on it, with distribution codes J and P) to my return.

Now here's the rub. By adding the 1099-R, I have now increased my AGI, which then affects how much I can put into my Roth IRA. Previewing the full tax return (all 900+ pages), form 5329 now says I have to remove an additional amount from my Roth IRA (I created an additional excess contribution ($420) by adding the gains from the 1099-R, which increased my AGI, which reduced my Roth IRA contribution allowed).

This looks to me like it is going to create perpetual amendments as I remove excess contributions and increase my AGI with the gains from the contributions, over and over again (because the previous 1099-R was gains, not losses, I'm pretty certain future excess contributions will have gains).

Am I doing something wrong here? Is this how this is supposed to be?

[macuser_22 · Accepted solution]

Unfortunately that is the "catch22" for removing an excess that is less than the total contribution.  Removing only the exact excess amount will create a new excess due to the increased AGI on the remaining contribution in an endless loop.    You should always either have the entire contribution returned or have more than the original excess returned so as not to create a new excess due to the increased AGI.

[naviator2003]

@macuser_22 Thanks for the response. In short, the government, in their infinite wisdom, didn't take this situation into account, and, in effect, let the investor suffer by needing to pull out more than what's needed...

[macuser_22]

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@naviator2003 wrote:

@macuser_22 Thanks for the response. In short, the government, in their infinite wisdom, didn't take this situation into account, and, in effect, let the investor suffer by needing to pull out more than what's needed...

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No.  The Gov. (the tax law) only says you will pay a penalty on any excess - it does not calculate it for you.

Actually this is something that TurboTax could warn you about but does not.    TurboTax could also calculate the correct amount to remove, but does not.   This has existed for years.