Need help with 5329 for Corrective Roth IRA distribution
I realized that I contributed to my Roth IRA in 2021 & 2022 but my income was to high to make a contribution. I have taken out the contributions and since it is before April 15th, I believe they are corrective. My question is how to complete the Form 5329. Do I enter the amount I took out (both the 2021 contribution and the amount I had contributed so far in 2022) on line 20 even though I didn’t take the money out until 2022? Or do I just enter the 2021 amount on line 20 and do another 5329 in 2022 showing the amount I took out for 2022?
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-10 20:53
Did you request that these specific year contributions be returned to you, after which the Roth custodian calculated the gain or loss on those contributions? If so, and you received more back than the amount contributed you will owe tax and penalty (if under 59.5) on any gain received, but you will not need a 5329 to report any penalty. You will also not need a Form 8606 to report the distribution, but you will need to include an explantory statement with your 2021 return regarding the 2021 contribution and it’s return. If you made the 2021 returned contribution in 2021, any earnings returned will be taxable on your 2021 return.
Permalink Submitted by Leesa Hollenbaugh on Fri, 2022-03-11 19:57
Yes, I requested that the specific year contributions be returned. I actually got back less than I contributed due to losses so I don’t believe there will be any penalty. So I don’t need to report the 2021 corrective distribution (received in 2022) on line 20 of the 2021 5329? Won’t they see my contribution on form 5498 and see that I made too much to make the contribution? Or will the explanatory statement take care of that?
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-11 21:19
If your contributions sustained losses and you get back less, there will be no tax or penalty. The penalty is only owed if gains are distributed. And even if you had gains, you do not need a 5329 to pay the penalty on the gain, you would show the penalty directly on line 8 of Sch 2. Your explanatory statement will suffice for the IRS until they get the 1099R reporting the returned contribution.
Permalink Submitted by David Mertz on Sat, 2022-03-12 13:22
Line 20 of Form 5329 is only for regular distributions from a Roth IRA, not for the loss-adjusted return of contribution that you receive before the due date of the tax return. Because the 2021 excess Roth contribution was returned before the due date of the 2021 tax return, nothing about the 2021 contribution and its return goes on Form 5329 and with no excess contributions carried in from 2020, nothing at all goes on Form 5329 Part IV.