Reporting excess IRA Contributions

[mgreen10]

For tax year 2020, I contributed $7,000 in after-tax dollars to my Roth IRA. While doing my taxes in Mar'21, I found out my AGI was in the phase-out range ($196,000-$206,000) for IRA contributions. TurboTax calculated that I could make a partial contribution of $3,760 so I contacted my brokerage company in Mar'21 to withdraw the excess $3,240 plus earnings.

In 2022 I received a 2021 1099-R showing removal of the $3,240 + $1,670 in earnings. Now I am amending my 2020 return to add the $1,670 earnings to my gross income. Because I am in the IRA contribution phase-out range, the additional $1,670 in gross income reduced my allowable IRA contribution form $3,760 to $2,590. This means I now have a new excess contribution of $1,170 in the IRA. I will need to contact the brokerage company again and request another excess withdrawal. The earnings from the excess $1,170 will again increase my AGI and again reduce my allowable IRA contribution. This cycle will repeat over and over, each time adding earnings from another excess contribution to my AGI and again reducing my allowable IRA contribution.

How do I correctly handle this situation on my tax return?

[mgreen10]

Can anyone help me solve this problem with return of a Roth IRA excess contribution, please?

[DanaB27]

Yes, the earnings are taxable in 2020 and therefore will increase your MAGI, therefore it is recommended to withdraw some extra if you had a lot of earnings.

Since the due date of the 2020 tax return has passed and you didn't remove the excess by December 31, 2021, you will need to pay the penalty for 2020 and 2021 on the $1,170 excess contribution. But the good news is since it is after the due date you will only have to remove the excess and no earnings. You will request a regular distribution for the $1,170 and this will go on your 2022 return.

To get the penalty calculated on your 2021 return:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
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

[mgreen10]

Thank you for your reply regarding my Roth IRA!

I did back out the 2020 first excess contribution and $1,670 in earnings in Mar'21 before the 2020 tax filing deadline so will pay no 6% penalty for it on my 2021 return. Now I am amending the 2020 return to declare the $1,670 of earnings from that backed out contribution. That in turn increased my 2020 AGI and reduced the 2020 IRA contribution I can make. The reduced contribution limit created a new 2020 excess contribution of $1,170 (and earnings). My understanding is that I must also add those earnings to my 2020 amended return because that is the year the excess contribution was made. This will further reduce the 2020 contribution limit and create a new 2020 excess contribution and earnings and the problem just repeats--all pertaining to tax year 2020. But I believe you are saying that since I will owe a 6% penalty on the $1,170, I do not withdraw the earnings or add them to my 2020 AGI. Depending on when an excess contribution is reversed, you either you pay the 6% penalty on the excess contribution or you add the earnings to your AGI--but not both. Is that correct?

Let me make sure I understand your answer. If I ask my brokerage firm to return the second excess contribution of  $1,170, before the 2021 tax filing deadline next month, I will not back out the earnings with it. This means there will be no further increase to my 2020 AGI and no further reduction of my 2020 IRA contribution limit, ending the infinite loop. I will however pay the 6% penalty on $1,170 on my 2020 amended return. I will also pay the 6% penalty on my 2021 return even though I reversed the excess contribution before the 2021 filing deadline, right? That should wrap up everything. No other amended return besides 2020. Do I have all this correct?

One last question...you stated: "You will request a regular distribution for the $1,170 and this will go on your 2022 return." (I interpret "regular distribution" to mean a request to return an excess contribution, not simply an IRA withdrawal) Since this is a Roth IRA, the contribution was made with after-tax money so the $1,170 will not go on my return, correct? If so, can I request the return of excess now and include it on my 2021 return (not yet filed)?

Thank you again very much! This is very helpful!

[DanaB27 · Accepted solution]

Yes, since this new excess for 2020 is removed after the due date of the 2020 tax return you only need to remove the new excess contribution of $1,170 and not the earnings. But you will have to pay the 6% penalty for 2020 and 2021 since the excess wasn't removed by December 31, 2021. You do not need to request an excess contribution distribution, you can take a regular distribution since it is after the due date of the 2020 return. You have until December 31, 2022, to remove the excess to avoid another 6% penalty on your 2022 return. This regular distribution will be reported on your 2022 tax return but it won't be taxable.

Yes, once you amended your 2020 return to report the return of the first excess contribution and earnings (which created the second excess of $1,170) you won't have to change anything else on your 2020 tax return. TurboTax will create Form 5329 for the 6% excess contribution penalty on the $1,170 and you are done with 2020.

Yes, you will have to pay the 6% excess contribution on your 2021 return. This will be the last year you have to pay the penalty on the $1,170 excess if you remove the excess with a regular distribution by December 31, 2022.

@mgreen10

[mgreen10]

Thank you so much for your invaluable help in multiple replies! You have been a life saver. I can't thank you enough!