I accidentally contributed to a Roth IRA over the past 3 years while being over the income limit. Below are my total contributions:
2021 - $6,000
2022 - $6,000
2023 - $6,500
The current value of the account is just over $13,000, reflecting a loss of roughly ~5,500. How do I handle this since everywhere I check describes a situation where the account has gains, not losses. The cost basis of my investment is well above the current value.
This is the response I got on reddit. Is this correct?
To resolve the first two years you must remove $6,000 each, or offset it with an allowed contribution.
Evidently you don't have any allowed contribution(s).
To resolve the third year you must remove the remaining money if that is less than $6,500.
You owe penalties of 6% yearly on money that should not be in your Roth IRA when it is a disallowed contribution that was not timely resolved.
@fanfare So I'd pay a 6% penalty on $6,000 and then 6% on $12,000? The fact that by year end 2021 the value was less than $6000 and by year end 2022 the value was significantly less than $12,000?
After the due date of the tax return, the penalty is on your excess contribution remaining after distributions, which was $6,000 and 12000.
The penalty for 2023 will be zero if you get all the money out by year end.
The lower year end value in 2021 or 2022 doesn't help you because you took no disitrbution in those years.
Ok so I file form 5329 for 2021 and pay 6% of $6,000. Then I file form 5329 for 2022 and pay 6% of $12,000 and that's it? No other paperwork required?
In addition to the above I request a withdrawal of excess contribution from Fidelity for the remaining monies over $12,000 which won't be penalized?
yuo still have to do a 2023 Form 5329 for the remainder but the penalty will be zero if account is empty.
@fanfare Ok I already did the request for excess contributions. Should I just have withdrew the entire balance instead and did a form for 2023 like you say. Or am I ok doing the request of excess contributions and then file the form on top of that?
Because your Roth lost so much value I expect that there are no positive earnings attributable to your 2023 excess contribution. The custodian should return everything.
But, if you start by asking for the most recent contribution first, you will get back $6500, plus any earnings.
I didn't respond previously for this vary reason. Assuming that this is the only Roth IRA, it's not clear how the amounts returned are to be allocated to the various excess contributions given that the balance is less than the amount of the excess contributions. Taking a distribution of the entire amount will reduce the penalty to zero since the penalty based on the lesser of excess or the year-end balance.
2023 is different since it is not after the due date of your 2023 return.
so it will depend on whether the custodian's calculation is positive or negative.
I already withdrew $12,000 and requested the return of excess for the remaining $935 so I hope that's ok. Do I file two form 5329's? One for 2021 and one for 2022? Or just one form for 2022 and that'll take into account the 2021 year too? I'm not sure if you're able to do both year penalties in one form or not.
My final question, I just opened a traditional IRA but it shows I've already done a max contribution of $6,500 for 2023. Because I withdrew the $12,000 and requested a return of excess for the remainder, am I able to contribute $6500 into my new Traditional for 2023? Or should I skip this year since I contributed into the Roth?
You need to file a 2021 Form 5329 showing an excess contribution of $6,000 and a 2022 Form 5329 showing this $6,000 carried in from 2021 plus the $6,000 excess contribution for 2022 for a total excess of $12,000. The actual amount of the penalty will depend on the timing of the contributions and the December 31 account value each year.
The penalty is based on the amount of the excess contribution or the year end value of the IRA, whichever is less. The amount of contribution for a particular year that is made after the end of the year by the due date of the tax return must be added to the actual year-end value, so if the $6,000 contribution for 2021 was made in, say, February 2022, the penalty is on $6,000 even though the actual December 31, 2021 value was zero.
Having made the $12,000 distribution first, it's not clear if the distribution of the remaining $935 constitutes a return of the entire $6,500 contribution made for 2023 or not. I'm not aware of any IRS guidance on correcting excess contributions made over multiple years when the present value in the individual's Roth IRAs is less than the total of the excess contributions.
According to Form 5329, the remainder of the $6,500, Line 24, will carry over to next year but won't result in additional penalty.
That is to say, the only way to clear Form 5329 is to become eligible for a Roth contribution and use that to offset the remainder.