Advise on how to report Excess Roth IRA contributions

Submitted by Steve Karkosky on Thu, 2019-02-21 18:31

Please advise how to report Excess Roth IRA Contributions for 2016-2018. Both spouses contributed to their Roth IRA accounts since 2003. Even though they both retired in 2015, they continued to automatically fund $ 6500 each year to their Roth IRAs through 2018. After they filed their 2018 tax returns in January 2019, they discovered they were not eligible to contribute in 2016, 2017 and 2018 because of not having any earned income reported in those years. At that point, they submitted a request with their IRA custodian to remove the excess Roth IRA contributions for those three years. The 2018 contributions of $6500 each, less the losses were removed before the deadline and were considered as having never been contributed. However, the excess Roth IRA contributions of $6500 each were removed for 2017 & 2016 after the deadline for those years, so they owe the 6% excise tax for 2016-2018.

Can you give guidance on how to report on 1040X, 5329 and 8606 for the tax years of 2016, 2017, and 2018? Also, is it appropriate to submit a 8880 Savers Credit with the amended returns for 2016 & 2017? They did not submit 8880 originally with their tax returns for those years. They were below the income limit to qualify for the Saver Credit in those years, but had a qualified distribution in 2016 in addition to the Roth IRA contributions they made, so they thought that made them ineligible to take the credit in 2016 and then again in 2017 and 2018.

Thank you for your guidance. It is much appreciated.



Submitted by Alan - IRA critic on Thu, 2019-02-21 19:54

  • You can file the 2016-2018 5329 forms without a 1040X since they are considered tax returns, but if you want to file an 8880, then you need a 1040X and may as well attach the applicable 5329 for each year to the 1040X.
  • Do the 2016 5329 first for each spouse, entering 6500 on lines 23 and 24, and figure the 6% excise tax on line 25. Note that the tax of 390 each will be less if the value of a spouse’s total Roth IRAs at year end is less than 6500.
  • Before proceeding to the 2017 5329 and savers credit issues, please advise the amounts each spouse distributed in 2016, as that affects both the 5329 and the savers credit. Were those distributions reported on a 2016 8606?

Submitted by Steve Karkosky on Fri, 2019-02-22 17:07

1. Answer to Note in bullet point 2 is that the value of each spouses $6500 contribution at 2016 year end was less:Spouse 1 $6500 at year end 2016 was $5663.73.Spouse 2 $6500 worth at year end 2016 was $6368.26.2.  Amount each spouse distributed in 2016:Spouse 1 took a $77000 distribution in 2016 and contributed $ 6500 to Roth IRA.Spouse 2 took no distribution in 2016 and contributed $6500 to Roth IRA.3.  The distribution was reported on 1099-R and on line 15a of 1040 for 2016 married filing jointly.  No 2016 8606 filed yet. 

Submitted by Alan - IRA critic on Fri, 2019-02-22 18:01

  • OK – the 6% excise tax is calculated on the excess amount, but on the year end value of all Roth IRAs if less. You refer to the value of the contribution and figure would be used if it is ALSO the year end value of all Roth IRAs for the respective spouse. Form 5329 refers to this rule. To be clear, this does not reduce the amount of the excess contribution, just the amount of the annual excise tax.
  •  The 77,000 distribution must be applied as a reduction of contributions for savers credit purposes. Therefore, that distribution eliminates the savers credit for 2016 and 2017. The savers credit is also not available in 2018 since that contribution was removed.
  • Since the savers credit cannot be filed for any of these years, the 5329 forms could be filed alone with no need for a 1040X.
  • A 2016 8606 must be filed for Spouse 1 to report the distribution UNLESS that distribution was qualified. Spouse 1 must have reached age 59.5 to the day and have held a Roth for 5 years for that distribution to be qualified. In other words, spouse must have first contributed to a Roth IRA prior to 2012 and be 59.5 at the time of that distribution for it to be qualified and avoid an 8606. Otherwise, an 8606 needs to be filed to determine if any of that 77,000 was taxable or subject to penalty.

Submitted by Steve Karkosky on Sat, 2019-02-23 14:44

The 2016 distribution was qualified because Spouse 1 was 59.5 in 2014 and had funded the Roth prior to 2008.   So in that case the 8606 can be avoided as stated above for 2016.  From your guidence, the proper process will be for them to report the excess contributions of 2016 & 2017 that were in their accounts for all 3 years, on a seperate 5329 for each spouse.    No 1040X required.  Once they send a 5329 and a check for 6% excise tax on the year end value of each Roth contribution, that will eliminate all excess contributions.   But something else just occured to me.   Technically, the funds were not removed until the end January 2019.   So will that make it necessary to report that the 2016 & 2017 funds were in their accounts through  January 2019 on a 2019 5329 next year?   Also, will they still have to report the distribution of all the excess funds that will be reported by the custodian on 2019 1099-r, on their 2020 tax returns?

Submitted by Alan - IRA critic on Sat, 2019-02-23 17:22

  • Wanted to be sure that the 6% excise tax is applied to the excess amount unless the year end value of ALL ROTH IRAs for a spouse is less than the excess amount. This is not the year end value of any particular contribution, it is the total balance of all Roth IRAs as shown on Form 5498. The excise tax checks just pay the tax, they do not eliminate the excess contributions. The excess amount is eliminated by one of the options on Form 5329, but the 77000 distribution will not eliminate any of these excess contributions because it occurred in 2016, the year of the first excess amount. There are several scenarios how the 5329 will pan out, especially for spouse 1, so you will just have to work through the form year by year for each spouse.
  • The 2018 5329 will show the excess amounts still in the Roth, so the 6% excise tax is due for 2018 on the total remaining excess at the end of 2018. The removal in 2019 will be reported on a 2019 5329 line 20, so there will be no excise tax due for 2019 with that form. A 1099R will be issued for the distribution and for each spouse whose Roth IRA is already qualified, an 8606 is not required to report the distribution. It will go on line 4a of Form 1040 directly with nothing on 4b, the taxable line. If the other spouse’s Roth is NOT yet qualified that spouse would need to file an 8606 to report their distribution. The 2019 distribution is reported on the 2019 return filed in 2020.
  • It is possible that the IRS will bill late interest on the late payment of these excise taxes for 2016 and 2017. Sometimes they do and sometimes they don’t.

Submitted by Steve Karkosky on Sun, 2019-02-24 15:21

The $77000 distribution of spouse 1 occurred earlier in 2016 before the excess contributions were submitted.  So no help for spouse 1 for removing the 2016 excess contribution before the deadline.  Both Spouse Roth IRAs have a total balance greater than the excess contribution of each year.   So from that standpoint, both spouses 5329 should just show an excess contribution amount of $ 6500 in 2016 and $13000 in both 2017 & 2018 5329 to pay a 6% excise tax on those amounts from the 2016 & 2017 excess contributions.  Both Spouses 2018 excess contribution was removed with a loss of value before the deadline.  So no excise tax on those amounts. Thank you for your advise.  It is very explicit.  I am confident the amended returns will be submitted to the IRS correctly by following your guidence.   I appreciate your help.

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