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excess Roth IRA contributions

Forum|Forum|3 years ago
March 28, 2023
3 replies
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i think i am in a pickle. My wife and I contributed $7K each to a roth IRA for 2021 tax season. We also contributed $14K each to a roth ira for 2022 tax season. I have already filed my 2021 return and did not report the contribution in TT. I have yet to submit my 2022 tax return. I just learned that our MAGI for both 2021 and 2022 tax seasons exceeded the allowed threshold. what do I need to do to fix this situation?

Best answer by DanaB27

As fanfare mentioned you can request the return of the excess contribution plus earnings (by the due date) to avoid the 6% penalty for the 2022 excess contribution. Other options are listed here: What happens if I made an excess Roth IRA contribution.

For the 2021 excess contribution, you will request a regular distribution (without earnings) since the extended due date of the 2021 return has passed. You will get a 2023 Form 1099-R with code J and this belongs on the 2023 tax return. Make sure you include the 2021 excess in the net contribution amount prior to 2023 when TurboTax asks in the follow-up questions.

You will need to amend your 2021 tax return to add the 6% penalty. Please enter the Roth IRA contribution and TurboTax will automatically calculate the penalty on Form 5329.

You also will have to pay the 6% penalty on your 2022 return:

Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Continue and answer "Yes" on the "Do you have any Excess Roth Contributions"
On the "Enter Excess Contributions" screen enter the total excess contribution from 2021.

On the 2023 tax return, the excess will be resolved when entering the 2023 Form 1099-R with code J (regular distribution of the 2021 excess).

@gjgogol

fanfare

Employee

ask your custodian for the form "return of excess plus earnings" for 2022 contribution.

It is too late to do that for 2021 contribution since it is past the due date of your 2021 tax return.

you need to use a different procedure to unwind that one.

@gjgogol

fanfare

Employee

do you have a balance in your traditional IRA that exceeds your IRA basis?

if your answer is NO, you can try for a backdoor Roth conversion on your 2022 cotribution.

@gjgogol

G

gjgogolAuthor

@fanfare thanks for the info. I really don't know what will be left. 😞 As a first step the custodian wants to pull the funds and reinvest in a mutual fund. Will pulling the funds from Roth IRA be considered a withdrawal? Should I open up a traditional IRA to put it into? I neglected to mention in my original post is that my wife and I are 68, my wife is still working and I am retired. Does that affect how things are handled?

D

DanaB27Answer

As fanfare mentioned you can request the return of the excess contribution plus earnings (by the due date) to avoid the 6% penalty for the 2022 excess contribution. Other options are listed here: What happens if I made an excess Roth IRA contribution.

For the 2021 excess contribution, you will request a regular distribution (without earnings) since the extended due date of the 2021 return has passed. You will get a 2023 Form 1099-R with code J and this belongs on the 2023 tax return. Make sure you include the 2021 excess in the net contribution amount prior to 2023 when TurboTax asks in the follow-up questions.

You will need to amend your 2021 tax return to add the 6% penalty. Please enter the Roth IRA contribution and TurboTax will automatically calculate the penalty on Form 5329.

You also will have to pay the 6% penalty on your 2022 return:

Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Continue and answer "Yes" on the "Do you have any Excess Roth Contributions"
On the "Enter Excess Contributions" screen enter the total excess contribution from 2021.

On the 2023 tax return, the excess will be resolved when entering the 2023 Form 1099-R with code J (regular distribution of the 2021 excess).

@gjgogol

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G

gjgogolAuthor

@ DanaB27 Regarding your statement, "You also will have to pay the 6% penalty on your 2022 return:", I will have the pay 6% penalty on $14K for 2 years even though my contribution for 2021 was made in Dec 2021? Also, for 2022 return do I use only $14K or the $14K plus any gains/losses?

D

DanaB27

Yes, you will have the 6% penalty on the 2021 and 2022 tax returns (for the 2021 excess contribution) since it wasn’t removed until 2023.

You will only use the 2021 excess contribution amount as the prior year's excess contribution on your 2022 tax return ($7,000 for you and $7,000 for your spouse).

Yes, pulling the fund from your Roth will be a withdrawal. Please make sure that for the 2022 excess contribution, you request the withdrawal of the excess contribution plus earnings to get the correct Form 1099-R issued. The earnings will be taxable.

And make sure to request a regular distribution of $7,000 each for the 2021 excess to get the correct Form 1099-R since you are over 59 1/2 it will be either code T or Q.

Yes, if you have enough taxable compensation then you can put the 2022 excess in a traditional IRA. You would request a recharacterization instead of withdrawing the 2022 excess.

@gjgogol

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C

cpatmcc

Hello, I contributed $1,800 directly to a Roth IRA in 2018 when my salary didn't allow me to contribute anything. I withdrew the excess funds ($1,800) paid the penalty, and amended my return. However, every year since then, I encounter this questions, "Enter Excess Contributions to Roth IRA in Previous Years." Every year, I've been entering $1,800. Should I be entering that number each year? Or is it ok to put $0, since I corrected it so many years ago?

M

MinhT1

@cpatmcc

As you have already paid the excise tax and withdrawn the excess contributions, there is no longer an excess contribution to a Roth IRA, and you answer $0.

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