Moving Roth excess from 2020 to 2022

[Kellystaxes]

The IRS says that you can apply the excess contribution in one year to a later year as long as the total contributions for that later year are less than the contribution limit for the year. If that’s the case can move 2020 excess to 2022 contribution? I haven’t contributed any for 2022 but did meet limit for 2021.  So moving to 2021 is not an option. That’s why I’m wondering if I can move excess from 2020 to 2022 and if that’s allowed how do I go about doing that? What is the impact on the tax returns? Do I still pay a penalty? What about the earnings part of the excess?

[DanaB27]

Yes, you can apply the 2020 excess contribution to 2022 on your 2022 tax return. But you will have to pay the 6% penalty for 2020 and 2021. The earnings will just stay in the account.

To trigger the penalty for 2021 on Form 5329:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 (if it wasn't carried over).

Please follow these steps on your 2022 return to apply the excess to 2022:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 (if it wasn't carried over).
6. On the "How Much Excess to 2021?" screen enter how much you want to apply to 2022.

[dmertz]

You can make applying the excess to 2021 be an option by obtaining a return of part of your 2021 contribution from your Roth IRA equal to the amount of the excess.  This may or may not make sense depending on the amount of earnings required to be included in the distribution.  The earnings on the returned portion of the 2021 contribution will be subject to ordinary income tax and, if you are under age 59½, to a 10% early-distribution penalty.  With this portion of your 2021 contribution returned you'll have room to apply the excess from 2020 as part of your 2021 contribution.

Otherwise, you'll have the 6% penalty for 2021 on the excess from 2020 (as you also had on your 2020 tax return) and you can apply the excess as part of your 2022 Roth IRA contribution.  You'll simply make your new contributions for 2022 be less than the maximum by the amount of the excess that you'll be applying to 2022 and prepare 2022 Form 5329 accordingly.

[Kellystaxes]

thanks! Do I need to call the investment company to have to do something about this “move” from 2020 to 2022?

A follow up question: why cannot I just report this 2020 excess now on my 2021 return which is being worked on currently and pay the penalty now? Why do I have to wait till next year to pay the 6 percent penalty? I’m asking because now we are allowed to start contributing to 2022 naturally anyway. 

[Kellystaxes]

What is the 2022 form 5239 for? The penalty? I’m leaning towards just applying the 2020 excess to 2022 contribution as it makes more sense in my situation.  You are saying I can only do this on the 2022 tax filing next year?  

[dmertz]

Applying the 2020 excess as part of your 2022 Roth IRA contribution does not involve the investment company.  It will be done on your 2022 Form 5329.  Line 18 will have the excess carried in from 2021 Form 5329 line 24 and line 19 will have the amount of the excess being applied as a 2022 contribution.

The 6% excess contribution penalty for 2021 will be due with your 2021 tax return.  (This assumes that you do not make a return of any of your 2021 Roth IRA contribution to be able to apply the excess as part of your 2021 Roth IRA contribution instead.)

[Kellystaxes]

Thanks! 
when you say”.  Line 18 will have the excess carried in from 2021 Form 5329 line 24 and line 19 will have the amount of the excess being applied as a 2022 contribution.”

do you mean excess carried in from 2020? I do not have excess from 2021

[Kellystaxes]

Do I need to amend 2020 return also to pay 2020 penalty of the 6% by adding a 2020 5329 form??? Because the 2021 return in Turbo tax will only charge once for the penalty I don’t think it can trigger 2020’s. 
please advise!

[dmertz]

Yes, if you did not already report the excess contribution for 2020 on 2020 Form 5329, you must do so and pay the 6% penalty.

[Kellystaxes]

Can I file form 5329 2020 separately later with no 1040 or 1040x attached? Just by it self? 

[dmertz]

The Form 5329 can usually be filed by itself, but some IRS examiners want to see it with Form 1040-X if you filed a tax return for that year.  It doesn't hurt to include From 1040-X to show that there were no other changes to your originally filed tax return and to have a place to provide an explanation.