Withholding tax on Roth IRA Excess Distribution

[zorky9]

Do you need to have taxes withheld on a distribution for excess contribution on a Roth IRA for tax year 2021? How about for tax year 2023 if I am filing on time?

[RobertB4444]

If you remove the excess contribution before the filing deadline of the tax return and there are no earnings then it is a non-taxable event and you don't need to worry.  

If you remove the contribution after the filing deadline or there are earnings on the excess contribution then you will be taxed on that so withholding taxes may be a good idea.

@zorky9 

[zorky9]

For a distribution on excess contribution to Roth IRA for tax year 2021, I believe the earnings can stay in the Roth IRA account, and only the contribution is being distributed as excess. I've paid the 6% excise tax for tax year 2021. So to withdraw this excess contribution, it should be tax free correct? and it won't be subject to the 10% early distribution since this is a corrective withdrawal?

[RobertB4444]

That's correct - except that you owe the 6% excise tax for 2022 as well.  If the money stayed there then that is still tax due.  For 2023 you would enter that you removed the excess contributions and then it would revert to zero.

@zorky9 

[zorky9]

Got it. I should have mentioned that I did pay 6% excise tax in 2021 tax year for the 2021 contribution, and also the 6% excise tax on the 2021 and 2022 excess contributions in 2022 tax year. It was an oversight in not making the timely withdrawal of the excess for both tax years. 

The 2023 excess contribution is straightforward enough. 

I will not be requesting my fund admin to withhold tax.

If I missed anything, please let me know.

Thank you!

[RobertB4444]

You're all good.  Except for one thing that I missed earlier.  You said that you thought the earnings for the 2021 excess contribution could stay in the Roth - that is not correct.  The earnings are also considered an excess contribution and need to be pulled out in order to satisfy the requirements.

Here is a good article on this as well as instructions on how to enter all of it in TurboTax.

@zorky9 

[fanfare]

@zorky9 

after the tax due date for an excess removal

any earnings do stay in the Roth IRA.

you request a simple distribution of the amount carried forward in Form 5329.

The tax due date for 2021 and 2022 have both passed by.

@RobertB4444 

If the article says what you said, it needs correction.