Question

I contributed 1500 in excess to my roth IRA in 2020. I did not know this rule so I just withdrew all of this money and interest. Does it still count as a contribution?

Forum|Forum|5 years ago
January 23, 2021
1 reply
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I am not clear if I still pay the 6% excess tax even though I have now fixed my mistake by withdrawing the contribution and all interest I had earned for 2020.

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macuser_22

Employee

How did you withdraw it? You should have asked the IRA custodian for a "return of contributions plus earnings" and they would issue a 1099-R with the proper codes and entries for a return of contribution.

If you simply removed it as a normal distribution on your own then you might have a problem reporting it to avoid the 6% penalty. It depends on how the 1099-R will be coded when you receive it in Jan 2022.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

K

kmpeterson7260Author

Oh thank you so much! I didn't know I needed to withdraw them officially through my IRA custodian. I have canceled my pending transfer and found the form to fill out. Thanks!

macuser_22

Employee

@kmpeterson7260 wrote:

Oh thank you so much! I didn't know I needed to withdraw them officially through my IRA custodian. I have canceled my pending transfer and found the form to fill out. Thanks!

One thing to note is if you simply remove it as a normal distribution, the 6% penalty will be due but the earnings can stay in the account. The distribution of your own contribution will not be taxable.

A "return of contribution" by the IRA custodian will also not be taxable and no 6% penalty but any earnings returned will be taxable as ordinary income.

Some taxpayers in this situation intentionally opt to just remove the excess, pay the 6% penalty and leave the earnings in the account if the earnings have been more than the 6% penalty - they are money ahead by keeping the earnings and paying the penalty - either way the returned contribution itself is not taxable.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**