How to avoid the 6% penalty?
A little last minute,
I contributed full 7000 to my 2024 roth IRA, when I filing with the HR block software it prompt me that i have an excess 5410. I went to Vanguard removed the excess and called them to get the number (gross, gain, and tax withhold). Now is where I am stuck tried to get HR block to help but they are not much help. I entered a 1099R with the number given to me and on the program said that I don’t have the 1099R yet (should receive on jan next year) as far as I know I need to do a 5329 but on the form nowhere it let me enter I removed the excess before due date. Called HR block before, they said according to the program, I removed the excess before the due date I go back to the IRA form where I enter 7000 as my contribution subtract the amount I removed and re-enter 1590 instead 7000 and not to worry about 5329. Is that a correct way to work this?
Permalink Submitted by Alan - IRA critic on Fri, 2025-04-11 11:19
No, the correct way is the way you first attempted. Go back to where the program indicates that you have an excess of 5410 and see if there is a way to enter a fake 2024 1099R with the amount you received back in Box 1, in Box 2a show only the gain on the excess if any, and in Box 7 enter code 8J. Hopefully, that triggers a screen where you can make a brief explanatory statement about the amount of the excess, and the date and amount you received back in the removal of that excess.
If there was a gain on the excess, you need a 5329 to enter exception code “21” on line 2. This eliminates the penalty on the gain. There is no 6% excise tax. This should prevent the IRS from thinking that you have an uncorrected 2024 excess because they will get a 5498 next month showing that you made a contribution of 7000.
But if you only entered 1590 as your contribution, the IRS might contact you about the excess because they will not get the 1099R until next January. Use this only as a last resort.
Permalink Submitted by Jackie lam on Fri, 2025-04-11 15:53
I tried HR Block again for the 7000 contribution, on 5329 line 1 i enter 639 (the gain that i have) and line 2 639 and enter code 21. With that my line 23 is 5410 line 24 5410 and my line 25 remain to be 325. I am still getting hit with 6% penalty on excess contribution.
Permalink Submitted by Alan - IRA critic on Fri, 2025-04-11 20:07
There should not be any excess contribution penalty and Part IV of Form 5329 does not apply if you removed the excess. Did you enter that 1099R I suggested above?
You may have to call HRB again, and hopefully talk to a CSR who can help.