Correcting excess Roth contributions
Good afternoon,
A client made excess Roth contributions due to AGI for the 2017, 18, 19, 20, 21 tax years for 5,496 each year and 1,832 in 2022- a total of 29,312.
Unfortunately, their tax preparer during those year let those slide (not sure how it got past the software) and is gone and never reported/amended those returns along with the 2022 1099r that was associated with the distributions of those years. The new tax pro (hired in 2022, the same year the distributions were made) is requesting that the custodian correct the 1099r codes, I am not sure about this.
- 21,984 is coded J with the “taxable amount undetermined: box checked
- 5,038 is coded JP
- 1,461 is coded J8
The client received an IRS letter and the IRS is applying taxes to 23,445 of these transactions which is not a surprise to me given none of the tax returns were amended and no 5329s were filed (explained to the client there is no escaping the 6% tax and EWPs on earnings). The custodian said the codes are fine, just use 5498s and the 5329 to address the issue but this is a novel situation in my planning practice. Before I reach out to the custodian, can you point me to the procedure?
Thanks you so much, you are truly a valuable resource to our industry!
Permalink Submitted by Alan - IRA critic on Wed, 2024-10-30 16:15
The 1099R forms make sense and no correction is needed , therefore the custodian is correct.
21,984 was removed after the due date and should have been reported on a 2022 Form 8606 as a distribution of regular Roth IRA contributions on line 22, which would be non taxable. There should be no EWP for any of these non taxable distributions. A 2022 1040X with Form 8606 and Form 5329 should be filed, but the 5329 cannot be completed until the earlier year 5329 form are completed due to the cumulative nature of excess contributions.
The JP coded 1099R properly reflects the return of the 2021 contribution which had a loss, so no income tax or EWP due. This is not reported on Form 8606.
The J8 coded 1099R also reflects the return of the 2022 excess contribution, also at a loss, so same as the above.
Therefore, there should be no income taxes due, but the excise taxes will be considerable. 6% of 5496 on a 2017 5329; 6% of 10,992 on a 2018 5329; 6% of 16,488 on a 2019 5329; 6% of 21,984 on a 2020 and 2021 5329. Since the excesses were all removed in 2022, there will be a final 5329 for 2022 showing the elimination of the excess amounts, so no excise tax for 2022. There will probably also be late interest charges assessed for late payment of all these excise taxes and possibly a failure to file penalty.
Permalink Submitted by ufleming on Wed, 2024-10-30 16:32
Thank you so much!