correcting an excess 2019 Roth IRA contribution
Dear Alan,
I have clients who made excess $7,000 Roth IRA contributions for the 2019 tax year and haven’t withdrawn those contributions yet. Could you please confirm the following?
1. Since we’re withdrawing the excess contributions after 10-15-2020, we can leave the net income attributable to the contributions in the Roth IRAs.
2. They will need to file a Form 5329 both for 2019 and for 2020 and owe a 6% excise tax on these contributions ($420) for each year (total of $840 for each Roth IRA).
3. They will need to file a Form 8606 in 2021 to show the $7,000 distributions but those distributions won’t be taxable since they represent a return of their contributions.
Thanks in advance,
Chris
Permalink Submitted by Alan - IRA critic on Thu, 2021-05-13 16:08
All correct. The 2021 return will also need a 5329 to show the distribution that cured the excess amount. No excise tax for 2021.
Instead of withdrawing the 7000 each, if they will be eligible for a full Roth contribution in 2021, they could assign the excess to 2021 on Form 5329 and avoid the distribution. Excise tax would not change, just the distribution would be avoided. This could also be done for 2020 on the 2020 5329 IF they qualified in 2020 and did not make any TIRA contributions for 2020. If so, the 2020 excise tax would be avoided.