Roth IRA Excess Contribution Correction Multiple Years

Submitted by Andrew Porro on Fri, 2022-03-25 21:05

Hello,

So I recently learned of the MAGI limit on ROTH IRA contributions due to all the political chaos last year regarding Backdoor IRA’s etc… Because of that I realized I had over contributed since 2016. I have already done the disbursements and recorded them on my 2021 taxes.

I now need to go back and file 2016 – 2020 Form 5329 to make my penalty payments. I have the forms all filled out and ready to go but I have a question regarding the payment. I am sending standalone Form 5329’s with an explanation letter.

Should I send 6 separate checks (5 for me 1 for my wife) or a single check for the entire lump sum? I guess I should also ask can I mail them all in the same envelope/package as well or do I need to send separate ones for every year?

This link was a huge help on clarifying the process to follow:
https://irahelp.com/forum-post/14574-correcting-excess-roth-ira-contributions

Thank you for your assistance!

Andrew



Submitted by Alan - IRA critic on Sat, 2022-03-26 04:02

Over the years the IRS has not clarified their preferred format for 5329 forms reporting any excise tax payments. Some pundits have gone so far as to suggest a distribution distribution for each year’s excess amount, a separate check for each year’s excise tax, and separate envelopes for each year’s 5329. I doubt that many taxpayers provide this degree of separation for each year. But if you feel better adhering to these practices, it probably will slightly reduce the chance for error, lost forms, or return of the forms. 
Another more frequent issue is the filing of the 5329 by itself as an independent return v. including it with a 1040X for each year. The instructions indirectly request a 1040X if a prior return was filed, but most people do not file a 1040X since there is no real need for it. Still, some IRS agents are inclined to return a stand alone 5329 and request that it be refiled with the 1040X each year. I would tend to provide the 1040X before providing all the other separate documentation.

Submitted by Andrew Porro on Sat, 2022-03-26 15:04

Thank you for the reply and I am glad to see it isn’t just me that finds the instructions vague:
 
“Prior tax years. If you are filing Form 5329 for a prior year, you must use the prior year’s version of the form. If you do not have any other changes and have not previously filed a federal income tax return for the prior year, file the prior year’s version of Form 5329 by itself (discussed earlier). If you have other changes, file Form 5329 for the prior year with Form 1040X, Amended U.S. Individual Income Tax Return.”
 
I feel like I am in the middle of the instruction, I don’t have any other changes for the prior years, but I have already filed my 1040 for those year. The “And” is the part that makes it unclear.
 
I think I will try the middle, single check for each 5329 but 1 envelope and standalone form.
 
Do you know how to tell if they accept/process my forms, will the fact of them cashing my checks mean they accepted the forms/corrections? Thanks!
 

Submitted by Alan - IRA critic on Sat, 2022-03-26 15:12

Yes, the instruction you are referring to has caused issues for years, since it should have been more specific, given that most people with IRAs have filed tax returns, and the instructions just infer that you need to file a 1040X. Still, the 1040X performs no function other than possibly to provide an expllanation box to enter why you are filing the 5329.
In most cases the IRS does not respond to your forms. I guess they assume if you do not hear from them, the forms have been accepted, with your cancelled check as your documentation. So I agree with your plan of action.
Note that the IRS may or may not bill you late interest for the excise taxes that are late.

Submitted by Andrew Porro on Sun, 2022-03-27 14:34

Sorry, I have a follow-up question. Should I mark the “Amended” check box for these forms? Going through my old taxes it doesn’t appear I submitted any 5329 for these years.
This feels like it falls into the same gray area in the instructions regarding the 1040x….
Interestingly, I opened up the instructions for 1995, even though that is older, they are more specific on when to file with 1040x
“If you owe a tax for that previous year because of an early distribution, complete the appropriate part of Form 5329 for that year and attach it to Form 1040X, Amended U.S. Income Tax Return. Be sure to include the distribution as additional income on Form 1040X if not previously reported. If you owe only a tax other than the tax on early distributions for a previous year, file Form 5329 by itself for that year”
Based on old instructions, and the fact I didn’t file a prior 5329, I am leaning toward NOT checking the amended box, but your input would be appreciated! Thanks!

Submitted by Alan - IRA critic on Sun, 2022-03-27 14:43

Agree. If you did not file a prior 5329 for a year, do not check the amended box on the 5329 for that year. Since a 5329 is a return in it’s own right, it is possible to file a 1040X with a 5329 not checked as amended.

Submitted by JJ Smith on Tue, 2023-03-28 23:32

Do you use the most current version, or the year when you had the excess contribution that is past that 6 month mark (i.e. already filed)? 

Submitted by JJ Smith on Tue, 2023-03-28 23:34

I have a similar scenario, caught this year 2022 tax year unfilled so I can correct, but realized i over contributed in 2021 as well!  Do I use the 5329 form from 2021 or this year 2022?  Im pretty sure i dont have to amend my return just send this form + pay penalty, but not sure if i should check amended? 

Submitted by Alan - IRA critic on Tue, 2023-03-28 23:46

  • File a 2021 5329 with Form 1040X to pay the 2021 excise tax. If you file the 5329 by itself, the IRS may not accept it and ask for the 1040X. The 2021 excess carries over to 2022 for which you apparently cannot contribute either. You will then have to file a 2022 5329 owing another 6% on the 2021 excess. You must then withdraw the 2021 excess by the end of 2023 to avoid a third year tax. These form carry over the excess from one year to the next to always complete the oldest year with an excess first. If you complete the 5329 correctly, you will see that you can correct the excess (after the due date) in either of two ways. First, you can absorb it into the following year if you would have been eligible the following year and did not otherwise contribute. Or you can correct the excess by distributing it. Form 5329 handles all of this.
  • As you said, you can correct the 2022 excess prior to the due date by having it returned to you adjusted for gain or loss and that will avoid the excise tax for that contribution. But the due date has passed for the 2021 excess.

Submitted by JJ Smith on Wed, 2023-03-29 01:52

Thank you for that.  for for the 2021 tax year that I was over $1320 *6% = $79 penalty.  Im mailing off a form 5329 for 2021 with $79 enclosed.  As of yesterday i had vanguard do my excess withdraw 2021 $1320, 2022 $4440 unfiled, 2023 $1110 unfiled.  Are you saying with this years 2022 return I also need to do another form 5329 for another $79?  In my software it asked if I over contributed in 2022 and I said yes then it asks if I did an excess withdraw and i put yes.  I reviewed my forms and it did not generate a 5329?  Is that because I didnt do an amended 2021 1040x?  Since I didnt do an amended return could I just do that second 5329 for 2022 stand alone like I did for 2021?   I guess i just need to know why folks are hesistant to file amended vs just sending the 5329?  Thanks!

Submitted by William Tuttle on Wed, 2023-03-29 14:16

You have an additional required Roth distribution if you had a loss and the removal total was < your excess contribution.

Submitted by JJ Smith on Tue, 2024-01-09 21:21

Hi all follow up to my question from last year now that we are in 2023I just recieved 3 2023 1099’s that i believe are for 2021, 2022, and 2023 withdraws, realated to the scenario above. 

  • 1st – 2021 Box 1) $1320.00  2a)blank (not zero) 2b) X  7) J
  • 2nd- 2022 Box 1) $3891.110  2a)$0.00  7) JP
  • 3rd – 2023 Box 1) $1117.21 2a)$7.21 7)8j

 When i went to fill this out in my software its asking for my basis in Roth IRA contributions:  I thought once I got to 2023 with the 1099r it was going to be smooth sailing after doing the 5329’s last year.  Im stuck on 2 things 1) How do I calculate the roth basis and why do i need to do this?2) For the one 1099r it came back with 2b checked for taxable amount not determined this was from the first year that I had a partial overcontribution that I paid the penalty on.  What do I need to do here?

Submitted by David Mertz on Tue, 2024-01-09 21:41

  • The code J Form 1099-R is for the corrective distribution of the $1,320 excess contribution made for 2021.
  • The code JP Form 1099-R is for the corrective distribution of the $4,440 excess contribution made for 2022.  Box 2a is zero because there was a $548.89 loss attributable to the $4,440.
  • The code 8J Form 1099-R is for the corrective distribution of the $1,110 excess contribution made for 2023.  Box 2a shows a taxable gain of $7.21 on the $1,110.
  • Your basis in Roth IRA contributions is what you have contributed to the Roth IRAs, not including the contributions $4,440 and $1,110 contributions that were returned; contributions returned before the due dates of the respective tax returns do not add to contribution basis.  If your only other contribution you’ve made to a Roth IRA is the $1,320 contribution made for 2021, your basis is $1,320, making the taxable amount of the code-J distribution nontaxable, calculated on Form 8606 Part III.  This $1,320 is also to appear on line 20 of your 2023 Form 5329.

Submitted by JJ Smith on Tue, 2024-01-09 21:53

Thanks DMx!  So ive been contributing to my roth for over 20 years opened in late high school.  For 2021 to today i the only contributions are the ones that we see here that I had Vanguard fully remove.  Does that change anything? For the one $1320 amount from 2021 (you are correct) that has  “2b Taxable amount not determined” checked what do I need to do, anything?

Submitted by Alan - IRA critic on Tue, 2024-01-09 21:55

  • Your Roth IRA basis is required for reporting of the 1320 distribution (Code J). This distribution was not accompanied by any gain/loss because the due date for removal of a 2021 excess had passed. Therefore, Form 8606 must be filed to report this distribution of 1320 and line 22 of Form 8606 should contain your total regular Roth contributions basis (do not include the 2022 and 2023 contributions as they were returned to you). As long as it is 1320 or more, this distribution will be non taxable.
  • Recheck the year you are showing as I think you may have mixed them up. The 1320 distribution must have been the 2021 excess, the 3891 the 2022 excess and the 1117 the 2023 excess.
  • If so, the removal of the 2022 and 2023 excess amounts do not go on the 8606, but they should each be reported with an explanatory statement, so hopefully your tax program will support the statements. You will end up with $7 of taxable income.

Submitted by JJ Smith on Tue, 2024-01-09 22:10

Thank you again!  You are correct and I updated my dates above.  My tax program did ask me to provide statements on each of the 1099r so i think im good there.  Going back to the Form 8606 which must be why “Freetaxusa” is asking for my basis to fill out.  Say I have contributed 100k over the course of 15 years do I need to go back to vanguard and add up all of my contributions?  Does this have to gnats ass percise?  I have 100ks in my Roth and im sure atleast 40-75k of direct contributions.  Defintely more than the 1320. 

Submitted by Alan - IRA critic on Tue, 2024-01-09 22:32

  • In this situation, I would just state your regular Roth IRA basis as the total you are sure of, eg 40k.  That’s plenty enough to make your distribution non taxable. But you should still try to cobble an accurate figure together so you can report a future larger non qualified distribution that you might need to take accurately. Once you hit 59.5 your Roth will be qualified and you will no longer need the breakdown or have to file an 8606. 
  • It is highly unlikely that if you understate your actual basis (eg 40k when it is actually 100k) on Form 8606, that the IRS will consider that figure binding with respect to any future non qualified Roth distributions you might take.
  • The IRS actually has the forms (5498 and 1099R forms) to know your basis, but they apparently have not used these tools in order to provide them with an accurate total to check against your 8606.

Submitted by JJ Smith on Tue, 2024-01-09 23:31

Thanks all!

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