When to File?

Submitted by Laurie Purnell on Sun, 2019-04-07 01:59

Hello,

I discovered in January (2019) that my income limited my Roth IRA contributions for 2017. As a result, I withdrew the excess contributions from my Roth IRA in January 2019. I have a few questions regarding this. 1. I understand that I need to file 2017 version of Form 5329 to pay the 6% excise tax. Do I file the 5329 only or do I file the 5329 with a 1040X Form as an amendment to my 2017 taxes?
2. My investment firm informs me that a 1099-R will not be issued to me and the IRS until next January (2020). So, do I file the 5329 for 2017 now or wait until next January (2020) when the 1099-R form is sent to me and the IRS?

Thank you in advance for any advice!!



Submitted by Alan - IRA critic on Sun, 2019-04-07 02:22

  • The IRS 5329 Inst are somewhat unclear on this, but usually a 5329 filed alone will be accepted. Every so often the IRS will ask for a 1040X, even though there is no need for one. Your choice.
  •  The excise tax for 2017 was due a year ago. You should file the 2017 5329 ASAP, probably by 5/1 to reduce any late interest charges.  You also owe the excise tax for 2018 unless you qualified for a Roth contribution for 2018 that you did not make. In that case a 2018 will apply your excess to 2018 and eliminate the excise tax for 2018. Otherwise, you will owe the tax for 2018 as well. If you have already filed for 2018, treat the 2018 5329 the same as your 2017 5329, otherwise add it to your 2018 return.

Submitted by Laurie Purnell on Sun, 2019-04-07 03:10

I am so excited I found this site. The info is so good!! Thank you so much for your response Alan!!! Ok…so to delve into this a little more. After I caught the 2017 excess, I did my 2018 taxes and determined that yes my contributions for 2018 were limited also. In fact, I couldn’t contribute anything in 2018 because of the income limit. So, I am unable to apply the 2017 excess. This means that the 6% excise tax will been paid for 2017 and 2018. I have not filed my 2018 taxes yet because I have been trying to figure out how to do this. So, I will file the 5329 for 2017 now, and file the 5329 with my 2018 taxes to pay the 6% for each year. Now, as I said I was unable to contribute to 2018, however, I did. So, those excess contributions came out along with the earnings. My understanding is that because the contributions with earnings came out by tax filing time, it’s as if they didn’t exist. So, I only have to include the earnings as income on Form 1040 and pay the 10% on the earnings using form 5329 (I am under 59.5). My investment company sent me a letter for this 2018 excess with earnings. Again the 1099-R will not be issued to me or the IRS until next January (2020). But, it says in the tax instructions that I can file the 10% penalty with my 2018 taxes now and include an explanation. So, I will include this letter from my investment firm with my 2018 taxes. Last 2 questions about all this (I think): 1. Does Form 8606 come into play anywhere with these 2017 or 2018 excess contributions? 2. Do I need to worry about the IRS not having the 1099-R yet for the 2017 and 2018 excess contributions? I only have the letter from my investment company about the 2018 excess contribution fix. I have nothing from them about the 2017 excess contribution fix. Thank you again!!

Submitted by Alan - IRA critic on Sun, 2019-04-07 03:37

  • Most of your post is correct. One of the points is that you will not need a 5329 to pay the 10% penalty on the earnings distributed with your 2018 excess contribution. The 10% goes directly on Sch 4, line 59 which then flows over to line 14 of Form 1040. Also, do not include the letter from the investment firm with your return, but you do need to include an explanatory statement including the date and amount of your excess contribution for 2018, that you had the full contribution returned and what the amount was (including earnings) that you received.
  • Form 8606 is not needed with your 2018 return (or 2017).  But you will need an 8606 with your 2019 return to report the Roth distribution of the old excess amount from 2017. Since this distribution come from your balance of regular Roth contributions (on line 22), the distribution will not be taxable. You will also need a 5329 with your 2019 return to show that the excess amount showing on the 2018 5329 has been distributed and there will be no excise tax for 2019.  
  • Not a problem that the 1099R forms will not be issued until January. The IRS is used to it. The 2017 excess amount that was withdrawn is treated like any other distribution and the 1099R next January will just show Code J – in fact the Roth custodian did not even need to be told that the distribution was for an old excess amount. They only need to be told when you are removing an excess with earnings as was the case with your 2018 excess amount.

Submitted by Laurie Purnell on Mon, 2019-04-08 00:29

Thank you again, Alan, for your instructions!! Appreciate all you help!!

Submitted by David Mertz on Sun, 2019-04-07 12:41

  • The 2018 tax return does need Form 5329 if the IRS instructions for Schedule 4 line 59 are interpreted literally.  The instructions say, “If only item (1) applies [early distribution] and distribution code 1 is correctly shown in box 7 of all your Forms 1099-R, you don’t have to file Form 5329.”  The Form 1099-R for the return of the 2018 excess contribution will have codes J and P, not code 1.
  • Request a filing extension for your 2018 tax return.  Since we are close to April 15, it’s possible that you the return of your contribution made for 2018 not being accomplished by April 15 and you probably won’t be certain of the amount of earnings to include on your 2018 tax return.  For the deadline for obtaining the return of contribution to be extended to October 15, 2018, you must either request a filing extension or file your tax return by April 15.

Submitted by Laurie Purnell on Mon, 2019-04-08 00:35

Hi DMx,     Thank you for your reply!! Yes, I agree with you about having to file Form 5329 for the 10% penalty. My interpretation of the instructions was that you do not have to file Form 5329 if you are only reporting the 10% penalty. In my case, I have 10% penalty to report and the excess contribution from 2017. So, I am going to include both on Form 5329, add the total I owe from both sections, and put that total on line 59 of Schedule 4.   As for the extension, my investment firm already performed the return of excess contribution for 2018. This was done back in March. I have a letter from them reporting the exact contributions and earnings removed. The money was already removed from the account.    Thank you again for your help!!  

Submitted by Alan - IRA critic on Mon, 2019-04-08 02:30

  • The instructions for the use of Form 5329 to report the 10% penalty for Roth IRA distributions are conflicted. The following is highlighted in the 5329 Inst with respect to entering an amount on line 1 when the distribution is from a Roth IRA:
  • ” If you didn’t have a qualified first-time homebuyer distribution in 2018, and you didn’t convert or roll over an amount to your Roth IRAs in 2014 through 2018, you only need to include the amount from line 25c of your 2018 Form 8606 on line 1 of this form. “
  •  There is no line 25c because Form 8606 is not required to report the distribution of an excess Roth contribution with allocated earnings. The taxable amount shows in Box 2a, exempt from the ordering rules for Roth IRA distributions, and if no exemption from the penalty is being claimed on line 2, the instructions indicate that the Box 2a amount should not go on line 1. 
  •  That said, since you need to attach the 5329 anyway to report the 6% excise tax, whether you enter the 2a amount on line 1 or simply show the 10% penalty on Sch 4, line 59 likely makes no difference.

Submitted by Laurie Purnell on Mon, 2019-04-08 16:15

As always, thanks again, Alan!!! Your advice has been very helpful to me.

  • You wouldn’t happen to know how this is supposed to be handled on the State of NJ taxes, would you?
  • Initially, I thought I would only have to include the earnings from the 2018 withdrawal on my 2018 taxes, but I am not sure.
  • Are part of the returned contributions taxed bec they are unqualifie? And if so does that mean I have to amend my 2017 state taxes also?

Submitted by David Mertz on Mon, 2019-04-08 18:27

The tip quoted from the Distributions from Roth IRAs section of the instructions for Form 5329 can’t unconditionally apply to a return of contribution.  Code J is used with code 8 or code P for a return of contribution from a Roth IRA regardless of the age of the participant, so participants over age 59½ need to use an Other reason exception to the penalty on the taxable amount.  Since line 2 needs an amount along with reason code 12, line 1 will also need to show the amount (so that line 2 can be subtracted from line 1).  From this it’s apparent that the writer of tip failed to consider the case of a return of contribution, so I think it’s reasonable to treat the tip as not applying to any to a return of contribution from a Roth IRA.

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