Last year I sold my investment property - can I still contribute to Roth this year?

[Fldavem1]

We sold an investment property which put us, last year, above the 208k Roth MAGI threshold.  I already contributed to the Roth IRA.  And this year, without the investment property, we're well under the MAGI.  Do I need to do anything; will I get a fine or something?

[tagteam]

@dmertz 

[Fldavem1]

I think the reply was deleted - I only see a blank answer

[dmertz]

It's now beyond the deadline for correcting an excess 2021 Roth IRA contribution before the due date of your 2021 tax return, so you owe a 6% excess-contribution penalty for 2021, reported on 2021 Form 5329.  If not already done, you need to file that form and pay the penalty.

This excess carried into 2022 from 2021 can be corrected in one of two ways to avoid another 6% penalty for 2022.  Since you are eligible to make a 2022 Roth IRA contribution you can apply the excess as your 2022 Roth IRA contribution to the extent that your total IRA contributions for the year do not exceed the annual limit.  Otherwise you can make a regular distribution of exactly the amount of the excess, with no adjustment for investment gain or loss.  In either case your 2022 Form 5329 will show the resolution of the excess contribution.

[Fldavem1]

Thanks @dmertz.

I'm sorry, I just to be clear: Here's the concern (which likely you got right and I'm confused)

• 2021 MAGI with property AND salary = $250,000 (married filing jointly)
• 2021 Roth contribution (prior to the sale but the same year) = $5,000
  
  
• 2022 MAGI probably much closer to $90,000
• 2022 Roth contribution = $5,000

So

1. Is the current year's Roth limit based on the previous years filed MAGI? If so, I supposed I could simply reverse the Roth contribution (an investment company - perhaps it's possible).
2. If instead the contribution limit is based on same year as the MAGI (2021), and if I understand correctly, I should leave the contribution for 2022 (well under the threshold this year)  and I should file the 2021 Form 5329, pay the 6% penalty on the full $5k (so $300) from 2021?  And can that wait until I file my 2022 return or does that need to be filed immediately?

[dmertz]

Your 2022 Roth IRA contribution limit is based on your 2022 MAGI, which you say will be around $90,000.

If you have already contributed another $5,000 for 2022, that complicates things a bit.  You'll either have to obtain a return of $4,000 (only $3,000 if you are age 50 or over) of that contribution to make room to apply the $5,000 excess as part of your 2022 contribution so that the total treated as your 2022 contribution does not exceed the annual limit for your age.  The deadline to obtain a return of  part of your 2022 contribution is the due date of your tax return, including extensions, but reporting would be far much easier if you obtain that return of contribution before the end of 2022.  Otherwise you could simply make a regular distribution of $4,000 ($3000 if age 50 or over) by December 31, 2022.  (If your Roth IRA has lost value since contributing the new $5,000 for 2022, a return of a portion of that contribution would be the better choice since the adjusted amount distributed would be less than the amount being returned, otherwise it would be better to take the regular distribution.).

Separately you must file 2021 Form 5329 Part IV to report the excess $5,000 Roth IRA contribution for 2021 and pay the $300 penalty if you have not already done so.  There is no good reason to delay filing this since it's separate from your 2022 tax return.  Line 24 of this 2021 Form 5329 carries forward to line 18 of your 2022 Form 5329.