What action is required for an excess ROTH IRA contribution?

[jerrydanya]

In 2017, wife and I contributed the max amount to our ROTH IRAs. Pay raise during year made me ineligible to contribute to ROTH IRA. Just realized mistake (aug 2018) and recently completed appropriate form with my bank and had the $5500 (each of us) contributions removed from our Roth IRA accounts. I think I am within the 6 month window described in Instruction for Form 5329 Line 23 instruction. Do I need to do anything with the IRS? File the 5329 and pay the 6% penalty? I do not see a reason to file an amended return as it was a ROTH contribution and I took no deduction. Thanks in advance.

[Anonymous]

you were also required to remove any earnings thereon.  

to avoid the 6% penalty take the excess contribution (and associated earnings) back out of the account. you have until the due date of your return (including extensions) to withdraw the excess in order to avoid the 6% penalty for the year

the earnings that you take out of the account will be taxable as income and (unless you’re over age 59.5 or you meet one of the other exceptions) subject to the 10% penalty for early distributions of earnings from a Roth IRA.

[jerrydanya]

Thanks for the helpful answer. Can I complicate my scenario? Bank only refunded the contribution - earnings stay in the account. And the confirmation statement for moving the money out of the account read like it was going to be treated as a distribution (obviously early since I am under 59.5). I am getting the sinking feeling that I need to file the 5329 to pay 6% penalty for the act of excess contribution, and going to get hit with 10% penalty on the same amount for early withdrawal.

[macuser_22]

If you told the Roth trustee that you wanted a "return of contribution" and not just a normal distribution, then you should receive a 2018 1099-R next January with a box 7 code "PJ" and the total returned amount in box 1, the earnings (calculated by the trustee) in box 2a.   That would be reported on an amended 2017 tax return.  Only the earnings (if any) will be taxable and also subject to a 10% penalty if you are under age 59 1/2.  

If you just took a normal distribution then the 1099-R will just have a code "J" in box 7 if you are under age 59 1/2.  You will need to file an amended 2017 return showing the excess contribution and pay the 6% penalty for 2017.

You do not need to do anything now until you receive the 2018 1099-R, but you should talk to the trustee to be sure that they will be treating this as a return of contributions and not just a normal distribution which would be subject to a 6% excess contribution penalty in 2017, but not taxable in 2018 since withdrawing your own contribution will offset any tax - in that case the earnings stay in the account.

Sometimes it is better to just pay the 6% penalty and leave the earnings in the account if the earnings were more than the penalty.

[dmertz]

Assuming that these were a regular distributions and not a returns of contribution, although you'll owe the 6% penalties for 2017, the regular distributions do eliminate the excesses and the penalties for 2018 and beyond.  Your *2018* Forms 5329 will show the regular distributions on line 20 to be subtracted from the excesses carried over to line 18 from your 2017 Forms 5329.

[jerrydanya]

Again, many thanks for the helpful guidance....especially the guidance about not needing to do anything now (other than contact the financial institution about how they characterized the return). I was in a bit of a panic about getting the right forms filed very quickly to remain on the good side of the IRS.

[macuser_22]

Although, if it is going to be treated as a normal distribution and not a return of contributions then you will need to amend 2017 to include a 5329 form and pay the 6% penalty on the excess but I would not rush to do that until yiu know for sure how it will be reported.   You have 3 years to amend after the due date.

[jerrydanya]

macuser_22 : Thanks and much appreciated.

[jerrydanya]

FOLLOW UP: So it was treated as a normal distribution and I've completed the 2017 Form 5329s for both my wife and I. Last question (I hope)....instructions for the Form 5329 indicate also filing a 2017 1040X, but in looking at that document (and its instructions) I cannot determine which line I should make an input on (other than Part III Explanation of Changes). Perhaps just write in the amount on Line 20? Would that plus than explanation suffice?

[macuser_22]

I think you are going about it backwards.    If you amend 2017 and go to the IRA contribution and enter the Roth IRA contribution, the interview should tell you that you contributed too much and and ask if was removed - you answer no, since it was not removed,  TurboTax should than automatically include a 5329 form and calculate the 6% penalty and place it on the 1040 line 59 and the 1040X.

[jerrydanya]

Ok. I was doing this by hand filling in the forms vice using Turbo Tax as I understood you could not file the amended forms electronically. It's dawning on me that you can amend the 2017 via TurboTax and I assume the directions will say print and mail.

[macuser_22]

Correct - amended can only be mailed.

[jerrydanya]

Thanks. And my guess is that amending the 2017 within TurboTax will also generate the appropriate questions for my 2018 return.

[macuser_22]

Only if you have not started 2018 and transfer the amended .tax2017 file at the beginning of a new 2018 tax return.  Then the carry overs "should" be correct, but always check any transferred data for accuracy.

One possible problem, when e-filing 2018 the 2017 AGI must be the original 2017 AGI, not the amended AGI (I don't know if TurboTax accounts for that or not.)
 

[jerrydanya]

Crap....yes, I already started 2018 return. I've enjoyed using TurboTax for 15 years. Starting to wonder if I should go see a tax professional this year to sort this out.