Roth IRA excess question

Forum|Forum|3 years ago
November 5, 2022
11 replies
73 views

I have a tricky Roth IRA question. I have 2 Roth IRA accounts. I used backdoor IRA to contribute my personal Roth (Vanguard) and use mega backdoor IRA to convert after tax 401k to Roth IRA (Schwab). I have maxed out both accounts on both years 2021 and 2022.

Recently my company added 2021 401k matching $5k and over contributed. Schwab told me to remove excess on Schwab Roth IRA $5k. Since this is 2021 year money and it passed 10/15/2022 deadline, they will issue me 1099-R and that will be contributed to my income 2022. Here are my questions :

1. I read online and some articles saying the penalty for withdrawing excess from Roth IRA after 10/15 only needs to pay 6%, nothing else. But some article saying I need to pay 6%, and 5k considered as ordinary come (double taxation). I am very confused which one is correct ?

2. How to avoid double taxation ?

3. Some article saying I can leave the 2021 excess to carry over to 2022 IRA contribution. Since I already maxed out 2022 IRA, does it mean I should do the following :

a) move vanguard Roth IRA to Vanguard brokeage account including gain to clear 2022 quota b) Request Schwab Roth IRA sending the excess money to Vanguard Traditional IRA account (since I am not eligible to deposit to Roth IRA directly) c) After money comes in Vanguard traditional account, then do Roth conversion to convert money from Traditional IRA to Roth IRA

My main goal is to not get "double taxation". Please share your thoughts !

Best answer by dmertz

Thanks for your information dmertz.

My understanding from your post is that Roth IRA excess is non taxable and the easiest solution for my case is to request a check $5k (excess distribution) from Schwab Roth IRA account, and pay 6% penalty and be done with it. No double taxation on the excess distribution.

Could you please confirm my understanding is correct ?

If the excess Roth IRA contribution was made for 2021 or earlier, that's right. Make sure that the Roth IRA contribution basis carried in from 2021 includes the excess Roth IRA contribution made for 2021 or earlier so that TurboTax places the correct amount on 2022 Form 8606 line 22 to reduce the taxable amount to zero. The 2022 Form 5329 will show this same distribution on line 20, added to line 19 and that total subtracted from line 18.

You'll also need to make sure that you've filed 2021 Form 5329 to pay the 6% excess contribution penalty for 2021.