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Overcontribution to ROTH IRA 2 years ago

Forum|Forum|1 year ago
February 17, 2025
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Hi,

I realized in February 2025 that I overcontributed to my ROTH IRA and my husband's ROTH IRA in 2023. I have already filed my 2023 tax returns. I will be withdrawing the full overcontribution amount ($6500 from my Roth and $6500 from my husband's ROTH). I know there is a 6% penalty and I need to file a 5329. My question is do I also file an amended 2023 tax return to pay tax on the earned income for the excess contribution? We also overcontributed in 2024. I have not yet submitted those taxes so I know I can (and have) withdrawn the excess and calculated the NIA and paid tax on those earnings. But it is unclear to me if I do the same for 2023. The 6% penalty seems very low so imagine that I need to pay some kind of interest or tax on the earnings accumulated? Should I file an amended 2023 tax return and report those earnings on the 1099-R just like I am doing for 2024? Or how else do I report them?

Also - on my 2024 tax return, once I have fixed 2023 can I then say that I did NOT overcontribute in any prior years?

Thanks

Not A Product Question

Best answer by dmertz

"do I also file an amended 2023 tax return to pay tax on the earned income for the excess contribution?"

No. Because the corrective distribution is being made after the due date of your 2023 tax return, the corrective distributions need to be regular distributions of exactly $6,500 each, with no adjustment for earnings. The earnings are permitted to remain in the Roth IRAs when the excess is removed after the due date of the tax return. Tell the financial institution nothing about this distribution being to correct an excess contribution, otherwise they might mistakenly try to process the distribution as a return of contribution before the due date of the tax return.

2024 is different because you are removing the 2024 contributions before the due date of the corresponding tax return. In the 2024 case, earnings are required to be distributed and the are taxable on your 2024 tax return to avoiding the 6% excess-contribution penalty on the 2024 excess contribution.

Because the excess contributions made fore 2023 were not corrected before the end of 2024, you must still show those as overcontributions for prior years when preparing your 2024 tax return. With the 2024 excess contributions corrected before the due date of the tax return, only the excess contributions made for 2023 will remain on your 2024 tax return to be subject to the 6% penalties on 2024 Form 5329. Those penalties will disappear on your 2025 tax return when you report the regular distributions.

D

dmertzAnswer

Employee

"do I also file an amended 2023 tax return to pay tax on the earned income for the excess contribution?"

No. Because the corrective distribution is being made after the due date of your 2023 tax return, the corrective distributions need to be regular distributions of exactly $6,500 each, with no adjustment for earnings. The earnings are permitted to remain in the Roth IRAs when the excess is removed after the due date of the tax return. Tell the financial institution nothing about this distribution being to correct an excess contribution, otherwise they might mistakenly try to process the distribution as a return of contribution before the due date of the tax return.

2024 is different because you are removing the 2024 contributions before the due date of the corresponding tax return. In the 2024 case, earnings are required to be distributed and the are taxable on your 2024 tax return to avoiding the 6% excess-contribution penalty on the 2024 excess contribution.

Because the excess contributions made fore 2023 were not corrected before the end of 2024, you must still show those as overcontributions for prior years when preparing your 2024 tax return. With the 2024 excess contributions corrected before the due date of the tax return, only the excess contributions made for 2023 will remain on your 2024 tax return to be subject to the 6% penalties on 2024 Form 5329. Those penalties will disappear on your 2025 tax return when you report the regular distributions.

R

rbtaxqAuthor

Amazingly helpful. THank you. One last question your answer brought up - for 2023 you said not to tell my financial institution about the withdraw of the overcontribution. Does this mean I just remove it from the ROTH via a transaction online that I do myself to one of my other accounts? Won't this show as an early distribution since I am below the age at which I can take money out of my ROTH and have it's own penalty? My understanding is the financial institution can use a special form to show this was an overcontribution? Thanks again -so helpful!

D

DanaB27

Yes, you will take a regular distribution since it was after the due date and you can do this online.

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free.

Next year when you enter your 2025 Form 1099-R:

Login to your TurboTax Account
Click on "Search" on the top and type “1099-R”
Click on “Jump to 1099-R” and enter all your 1099-Rs
Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
Answer "Owned Any Roth IRA for Five Years?" screen
Continue through the questions and make sure you enter the net contributions prior to 2025 on the "Enter Prior Year Roth IRA Contributions" screen (include the 2023 excess contribution).