Accidentally requested distribution to correct overcontribution for THE WRONG YEAR
I thought I had an overcontribution issue in 2018. In December 2021, I called my brokerage and asked them to take out $4,000 to fix it and they said “they were doing it for 2018.” I then received a 1099-R in early 2022 with distribution code J but no specific tax year listed. I thought all was fine. Then I realized my overcontribution was for tax year 2019, not 2018. My brokerage said they had no idea if I could “use” the distribution I requested “for 2018” to correct my 2019 overcontribution. Does anyone here know?
Otherwise, it would seem I have to request a new distribution of the full amount of my Roth IRA overcontribution from 2019 ($6,000) for which I will receive a new 1099-R and thus pay taxes on the full $6,000, IN ADDITION to having already paid them (this year) on the $4,000 that I mistakenly took out for 2018.
TLDR: Is a distribution to correct an overcontribution that results in a 1099-R “fungible” for different years, or is it necessarily linked to the year that you initially asked your brokerage to process it for?
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-06 23:44
Your brokerage firm does not sound well versed in basic IRA issues, either by the initial comments or the inability to respond to your second. At least the 1099R you already received is correct. Once the extended due date has passed for a contribution year, the corrective distribution is done just like any other distribution. No earnings are distributed and you have already incurred a 6% excise tax for one or more years.
Your income was probably too high for a regular Roth contribution for 2019, but the extended due date for corrective distributions with earnings for a 2019 excess was 10/15/2020. Dec 2021 was well past that. The time line assuming no excess contribution for 2018, but a 6000 excess (no contribution allowed) for 2019 will go as follows.
You will owe a 6% excise tax for 2019 on Form 5329. This will be paid late, so the IRS might also charge you late interest. The 2019 5329 should be filed with a 1040X. Since no distribution was made by the end of 2020 either, you wll also owe 6% for 2020 on a 2020 Form 5329 with 1040X. You could avoid the 2020 excise tax if you happened to be eligible for a Roth contribution in 2020 that you did NOT make and also did not make a 2020 TIRA Contribution. If that were the case you could apply the excess 2019 contribution to 2020, also using a 2020 5329, and not have to take a distribution. This is probably an unlikely scenario, but you need to investigate that possibility. Now assuming you could not have absorbed the excess in 2020, it is time to consider the distribution you did take in 2021 of 4000. You can apply that 4000 distribution on your 2021 5329 to reduce your excess to 2000 and as such would only owe 6% of 2000 on your 2021 5329. You must report the 4000 distribution on Form 8606 as well but it will not be taxable since it comes from your balance of regular Roth IRA contributions, tax and penalty free, but still must be reported on your 2021 8606. Therefore, the 4000 distribution did help, but not until 2021.
Because you still have a 2000 excess carrying over into 2022, you must now request a distribution of 2000 to totally eliminate the excess. But if your income permits a 2022 Roth contribution, you can also cure the excess by just contributing 4000 and absorbing the remainder of the excess and will not have to withdraw anything. Again, if your income is too high for 2022, you must request a 2000 distribution before year end. That will take care of the final 2000 of your excess from 2019 and your 2022 5329 will show the final distribution and there will be no excise tax for 2022. Again, you will have to file a 2022 8606 to report the tax free 2000 distribution for which you will receive a 1099R for 2000 next January.
For your final question, any distributions you receive after an excess year will apply against the excess. This is all documented on Form 5329. Therefore, that distribution of 4000 and your final 2000 will be fungible to apply against your outstanding excess amount for any year. This sounds complex, but a review of Form 5329, Part IV will expose the math explained above, and how your remaining excess goes to 0 on line 24.
To sum up the penalties: 6% excise tax on 6000 for 2019 and 2020, and for 2000 for 2021, a total excise tax based on 14,000, of which 6% is $840. The IRS may also bill you for late payment of the 2019 and 2020 excise taxes, which were due earlier than paid. There is no income tax due unless you took other distributions that tapped into your Roth earnings, but you will must report the 1099R forms on Form 8606. To do that you will have to know your regular Roth IRA basis accumulated to date, to enter on line 22. Normally, that basis would be more than the 6000 you are distributing, which makes your distribution tax free.
Finally, some good news. Because you owe the excise tax, any earnings that were generated on that 6000 from the time you made the excess contribution until you withdrew all 6000 can remain in your Roth for good, eventually becoming tax free.
Permalink Submitted by Big Mac Daddy on Mon, 2022-04-11 21:27
I am really grateful for this response. I am working now to implement your changes. My income has been too high every year since 2019 to contribute to the Roth, the year where I erroneously contributed a full $6,000. Also, as a slight clarification, I took out exactly $4645 (not just $4,000) in December 2021 of as an effort to fix my overcontribution due to thinking that my overcontribution was only a partial $4645 and not the full $6,000.
Does this make sense?
2019 year = file an amended return 1040x and updated 5329 to pay $360 (which is 6% of $6000)
2020 = file an amended return 1040x and updated 5329 to pay $360 (which is 6% of $6000)
2021 = I am working on these taxes now in April 2022. It is too late, since we are past December 31, to do any withdrawals to affect this tax year, so I will pay an excise tax of 6% of the remaining $1355 ( for an excise tax of $81) only that I should have taken out earlier. Then, during 2022 and before December 31, 2022, I will take out the remaining $1355 so that I will owe no additional excise taxes for the 2022 year.
2022 = When I get to my 2022 taxes in April 2023, I will have have had ALL the money out by December 31, so I will finally owe additional NO EXCISE TAXES 🙂
Permalink Submitted by Alan - IRA critic on Mon, 2022-04-11 22:03
That is correct. Be sure you complete the 2019 and 2020 year 5329 forms first and correctly carry over the excess to your 2021 5329 you are working on now. Your last 5329 will be for 2022 and will show that you distributed the entire remaining excess, with no excise tax due to 2022. For 2021 you also must file a Form 8606 to report the 1099R showing your distribution, but that distribution should be tax free because your line 22 will be more than your distribution of 4645.
Permalink Submitted by Big Mac Daddy on Sun, 2022-04-17 17:30
While I am sure this is a foolish question, could you confirm what you are referencing by “excess” when you say “correctly carry over the excess to your 2021 5329 you are working on now”?
Permalink Submitted by Alan - IRA critic on Sun, 2022-04-17 18:00
Your excess contributions total at the end of 2020 were 6000 and showed on line 24. That figure is carried over to your 2021 5329 on line 18. Enter the 4000 distribution you took on line 20 and 21. On line 22 you subtract the 4000 distribution from line 18, and that reduces your excess contribution to 2000. Line 24 will show your remaining excess amount of 2000 at the end of 2021. You will remove that 2000 in 2022, so that 2021 will be the last excise tax you owe. But you will also need a 5329 for 2022 showing the excess balance reduced to 0.
Permalink Submitted by Big Mac Daddy on Sun, 2022-04-17 18:53
Thank you! You are amazing. I just hit submit on this year’s taxes 🙂 Have a wonderful Easter weekend and thank you for all of your incredible help!