Excess Roth IRA contribution made in 2020, but designated for 2019
I discovered when preparing my 2020 taxes that I had an excess contribution of $1,485 in my Roth IRA for tax year 2019. The contribution was made in 2020, but designated for 2019. A separate contribution was also made in Feb 2020 for tax year 2020. My understanding is that I am past the deadline to timely correct the 2019 contribution and therefore need to pay the 6% excise tax for 2019 & 2020 and can remove the $1,485 excess contribution in 2021 (before the May 17th filing deadline) WITHOUT including earning (which I assume means earnings for any tax year – just remove the $1,485). However, when I completed the form for Fidelity, they are removing $112 in earnings related to my 2019 contribution. When I question this they tell me it is because the contribution was deposited in 2020, not 2019. However, they also tell me they will not be revising the Form 5498 sent to me in May 2020 which means my total contribution reported to the IRS for tax year 2019 will have a $1,485 excess. They also said that the transaction (including earnings) will be reported on a 2021 1099-R, but my understanding is that earnings removed are to be reported in the tax year the contribution was made (does made mean designated or deposited)? One Fidelity agent also told me I would not have to pay the 6% excess on the contribution because I was correcting before the 2020 filing deadline (based on the contribution deposit date).
When I talk to the IRS, they tell me it is the designation year that matters. However, one agent told me the earnings would not be removed and another told me they would (unfortunately we were disconnected before we could resolve this).
I have done a lot of research and talked to a lot of people and get conflicting answers. I cannot find anything that discusses a prior year designation or whether the correction dates are based on the tax year or the actual deposit date.
Can anyone clarify how this should work? I have so many answers and no definite guidance or reference to IRS regs other than Pub 590-A which doesn’t really spell it out clearly. Below is a summary of the excess contributions to date (all to Roth IRA).
Tax year 2019 – contributed $1,485 excess in Feb 2020
Tax year 2020 – contributed $1,500 excess in Feb 2020
Tax year 2021 – contributed $1,500 excess in Jan 2021
This is what I think I need to do (I am not yet 59 1/2 & Roth IRA was new in Feb 2020), but would love some confirmation/feedback. I plan to make all corrections before 5/17/21.
1. Remove $1,485 from 2019 contribution (without earnings) and pay 6% excise tax for 2019 & 2020.
2. Remove $1,500 from 2020 contributions (plus related earnings) and pay 10% early withdrawal penalty on earnings only. Include earnings withdrawn in 2020 income. The 6% penalty will not apply as the excess contribution will be deemed to have never occurred because corrected before the 2020 tax filing deadline.
3. Remove $1,500 from 2021 contributions (plus related earnings) and pay 10% early withdrawal penalty on earnings only. Include earnings withdrawn in 2021 income. The 6% penalty will not apply as the excess contribution will be deemed to have never occurred because corrected before the 2021 tax filing deadline.
Does all this sound correct? Any help would be greatly appreciated. Would especially love some references to IRS tax code, regulations or instructions that I could use to explain to Fidelity the above and my handling of the 2019 excess.
Permalink Submitted by Alan - IRA critic on Fri, 2021-04-23 00:53
IRA contribution are made for a given and are assigned to that year. Any excess contributions distributed with earnings by the due date (plus extensions) for the year to which the contribution is assigned avoid an excise tax for that year. Therefore, unless there was something incorrect about the form you submitted, their impression that you get an extra year to remove a 2019 contribution made in 2020 is incorrect. And you were correct to assume that your opportunity to do that ended on 10/15/2020. Perhaps Fidelity thought you were withdrawing your 2020 contribution, for which there is still time? You might check to see if you received a Form 5498 last summer showing a 2019 contribution of the amount in question.
Mixups of this type are rare for a firm like Fidelity, but the issue is confusing enough so that I always recommend simply requesting a distribution of 1485 in this case, without mention of an excess contribution or filling out a form for removal of excess. But if the excess was a TIRA contribution, you must advise the custodian per the 1099R Inst.
Since the distribution has not yet been made, perhaps this is a CSR error that would not have been actually made by the processing unit. In any event, earnings on your 2019 contribution have not been distributed yet, so you should be able to cancel the first request and just request a distribution of 1485, which will be reported like any other early distribution (Code J). That will save you the trouble of having to debate this issue further.
I assume that you cannot make any Roth contributions in 2019-2021 due to income being too high? If your income dropped and you were eligible in 2020, you might be able to apply your 2019 excess to 2020 on Form 5329, etc for 2020 and 2021.
Your plan is correct. Since the 2020 contribution may have generated high earnings (eg 25% or more if invested in stock equivalents, if the tax and penalty on the earnings is more than the 6% excise tax, you could treat 2020 like 2019, pay the excise tax on it and avoid tax and penalty on the earnings, which remain in the Roth IRA instead of being distributed with the excess.
And a final option, maybe the best one. If you do not have a TIRA balance, you could recharacterize the 2020 and 2021 excess amounts as non deductible TIRA contributions, then convert the TIRA back to Roth. You would owe tax on the gains, but no penalty since the there is no penalty on conversions. Forget this if you have a TIRA with a pre tax balance.
Permalink Submitted by Sherry Aramini on Mon, 2021-05-10 12:50
Thank you for the reply. I ended up requesting removal of all 3 excess contributions (2019-2021) and removed the earnings (which were not significant) for only 2020 & 2021. My follow-up question is this – I believe Fidelity will issue me a 1099-R in 2021, but I understand that I need to report the earnings on the 2020 excess contribution on my 2020 tax return using a substitute 1099-R? I’m not sure of the codes, but those may be provided to me in the letter I expect to receive from Fidelity once the distributions are processed. My question is this – the 2020 distribution was made in Feb 2020 and removed in May 2021 (before the tax filing deadline), which to me indicates there were earnings in both 2020 & 2021 on this excess contribution. However, everything I read indicates that the entire excess should be reported on my 2020 tax return? Is that correct? I thought there might have been 2 separate calculations – one from Feb 2020 to Dec 2020 for 2020 income and another from Jan 2021 to May 2021 for 2021 income, but that does not seem to be the case. Just want to confirm before filing my 2020 tax information since I won’t have an actual 1099-R. Thank you.