Rectifying Several years of excess Roth contributions

Question

Not realizing I was ineligible to contribute to my Roth IRA, I made excess contribution for years. In 2015, 2016, 2017, and 2018 I contributed the limit at the time of $5,500 per year when I was eligible to contribute $0. I realized this in April of 2019 before filing my 2018 tax return. I talked with my Roth IRA custodian and because I was still within the timeframe to remove my contribution for 2018 I withdrew that contribution ($5,500) as well as the gains on that contribution ($556). I also withdrew the excess contributions from the prior three years ($5,500 x 3 = $16,500) at that time (April 2019). My custodian sent me a 1099-R for the 2019 tax year in early 2020, which I unfortunately did not include in my 2019 return. I normally just use my 1099-INT and DIV from that company, so I totally missed the 1099-R. My mistake and I’m going to pay for it now. I just received a letter from the IRS about it recently and am trying to rectify my mistakes. Here is what the 1099-R says:

Gross Distribution (Box 1)	Taxable Amount (Box 2)	Taxable Amount Not Determined (Box 2b)	Federal Tax Withheld (Box 4)	Distribution Code (Box 7)
16,500		X	0	J
6,056	556		0	PJ

Notes: The $16,500 is the three years of excess contributions I didn’t catch in time (2015, 2016, & 2017). The $6,056 is the $5,500 excess contribution for 2018 that I caught in time before filing for 2018 taxes and the $556 in gains on that contribution.

My questions:

Why is the first line (the $16,500 of excess from prior years) coded at “J”? That appears to consider it an early distribution rather than an excess contribution withdrawal. Should this coded either “P” or “8” which would be a code for an excess contribution? When I enter this into TurboTax as an amended return for 2019 it treats the entire $16,500 as taxable income? Those were after tax contributions that were made in error, why would I owe income tax on them a second time?
Do I need to submit an amended return for 2019 (I assume so), and what about the other years that I had excess contributions? Do I need to amend them as well?
Here are my expectations on what I rightfully owe. Please let me know if I am wrong here:
- I owe a 6% “penalty” on any excess contributions in my account PER year (for example, my 2015 contribution of $5,500 I owe 6% of that each year for 2015, 2016, & 2017). I calculate that for all excess contributions that I didn’t catch in time (years 2015, 16, & 17) as being $2,970. I don’t see where or how that gets entered or calculated in TurboTax.
- I *might* owe 10% penalty on the gains from my 2018 contribution ($556). As well as probably capital gains tax on that $556. Not sure where or how that gets calculated in TurboTax.
- I might owe some assorted late fees, interest on amounts owed, etc. for not getting this right the first time and waiting this long to resolve this issue.
Here is what I do NOT expect to owe:
1. Income taxes on any removal of excess contributions. This is a Roth and there are post tax dollars to begin with and the removal is to correct a problem, not a normal distribution.
2. Any penalties or fees for removing money from the Roth while I’m younger than 59 ½. Again, this is not a normal distribution, just rectifying a mistake of excess contributions.

TurboTax doesn’t seem to allow me to enter any of this context and it just immediately thinks I owe everything as income tax and doesn’t seem to consider the 6% per year issue at all. Help! Sorry for the long post.

macuser_22 · Answer

The code P 1099-R is for the excess that was removed in time and does not have a penalty.

The code J is a normal distribution which is the only way to remove an excess that was not timely removed.

Since the 2015, 2016 & 2017 contribution were not removed within the time limit you will owe a 6% penalty for the year of the contribution and each following year until that excess is removed.

If removed in 2019 you owe the 2015 penalty for the 2015 tax year, again for 2016, 2017 and 2018, the 2016 penalty for 2016, 2017 and 2018, and the 2017 penalty for 2017, and 2018.

You do this by filing a 5329 form with the penalty for each missed year, the oldest first, 2015, The 2016 5329 would have both the 2055 excess and 2016 excess and the penalty for the total of both.

Likewise for 2017 and 2018.

You can get prior year 5329 forms here:

https://apps.irs.gov/app/picklist/list/priorFormPublication.html;jsessionid=TOt2soSKDxGFWF90jyq9I1GA.21?value=5329&criteria=formNumber&submitSearch=Find

You said you received an IRS letter - what does it tell you to do?

(A tax professional such as a EA, might be able to make a deal with the IRS to lower the penalties and could file the 5329 forms easier.)