Question

two consecutive years of making excess Roth IRA contributions when income was too high

Forum|Forum|4 years ago
May 8, 2022
1 reply
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I am over 60. I made a $7k Roth contribution May 2021 for year 2020 before filing that year. Then this year, 2022 discovered my MAGI was too high. Also made Roth contribution early April 2022 for year 2021 of $5717 and again MAGI to high. Now have both as excess contributions and need to pull them out.

I think i can do an amended 2020 tax and pay the 6% penalty tax of $420 and leave in the earnings and just take out the $7k to rectify the 2020 excess contribution?

But if I do the amended 2021 return for both amounts combined $7000(2nd year excess) and $5717=$12,717, before Oct 15,2022 do I have to take the earnings as a distribution too? and is there a tax liability on those? I know i don't have to pay the 10% early withdrawal because of age, but also thought i didnt have to pay on earning if the Roth account was established for 5 or more years?

How do I go about accomplishing this in Turbo Tax and what is my tax liability? Especially dealing with an overlapping excess and a new one all in the same 2021 return!

Any help is much appreciated!

macuser_22

Employee

You are correct that you must amend both 2020 and 2021 for the 2020 excess and pay the 6% penalty each year since the excess was not removed until 2022. The 6% penalty repeats every year until removed.

In TurboTax on the amended return go to the Roth contribution interview and step through until it asks about an excess. Enter it and it will add a 5329 form for the penalty.

For the 2021 excess if you filed you 2021 return on time (by Apr 17, 2022) then you have until Oct. 15 2022 to get a "return of contribution" where only any earnings will be taxable. Be sure the financial institution will issue a 1099-R with box 7 code JP that will have to go on an amended 2021 return when the 1099-R is received in Jan of 2023.

**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.**

I

isnobrd58Author

Thank you so much for your quick response. I was hoping I would avoid the 2nd year 2020 contribution's 6% penalty by taking the $7k distribution before the 2021 tax due date of Oct 15,2022. But it looks like it doesn't work that way? Sounds like once you go past the first year, you have no choice but to take the second year as a normal distribution and not a return of contribution, even if pulled out before the Oct. due date?

In that case will I be allowed to keep the earnings for both years in the Roth with no tax consequences, and just take the distribution of the original $7k contribution? Also, can you tell me if I will be assessed interest and late penalties on the $420(6% amount)? I might still be ahead instead of taking the earnings as regular income. Sounds like earnings distribution on excess contribution, is treated differently, then earnings taken on just a normal distribution if Roth held for over 5 years.

Again, thank you and appreciate the help. I won't make this mistake again!!