Overcontributed to ROTH due to unemployment
Hello —
I am usually pretty good at making sure I do not over-contribute to my Roth, but I did in 2020. I thought unemployment was part of the earned income and so I contributed more than I should have that year. I understand the way to correct this via 5329 forms (for 2020 and also 2021 as the 2020 error carried over to 2021) and have done the calculations. My question is whether it is best to file a 1040X for each year (with just this as the only correction) or to file 5329s for the two years. I understand that the 5329 is in itself a filing, but it seems to me that having this documented via a 1040X would be safer. Is that accurate? The 5329s would be simpler to file than two 1040Xs. (I noticed the 2020 error AFTER I filed my 2021 taxes and, thus, have to do both).
Lastly, it seems like this error might be common given how many people were collecting unemployment in 2020 and 2021. Is it possible that some of the CARES act created an exception for the Roth contributions / earned income qualifications during the pandemic?
Permalink Submitted by Alan - IRA critic on Sun, 2022-04-10 00:09
You or your spouse if filing jointly did not have enough earned income to cover a 2020 Roth contribution, disregarding the UC which is not treated as earned income? And if so, your 2020 excess could not be applied to 2021 on Form 5329 either? Either way, the IRS recommends filing a 5329 for a prior year using a 1040X, even though plenty of people have filed them without the 1040X and not had the stand alone 5329 rejected. The safer solution to finalize this issue would be to file the 5329 with a 1040X for the applicable year.
There were no provisions adopted to treat UC as taxable compensation for IRA contribution purposes due to Covid or any other situation.
You also need to actually cure any excess contribution by either absorption or distribution. To eliminate another excise tax for 2022, any distribution must be done before year end, and a 2022 5329 and 8606 must be filed to show how the excess was eliminated and that any distribution was not taxable as a return of Roth contribution basis.
Permalink Submitted by Jesse Ward on Tue, 2022-05-17 18:07
Thank you. I have now filed a 1040x with a 5329 for both 2020 and 2021 and paid the .06 fee. The excess has all been accounted for. I am not contributing in 2022 to make sure it will all be absorbed. I will file a 5329 next year to demonstrate that it has all been absorbed. I do not think I have to file an 8606 (have never done that) as I am not getting distributions yet and this is a previously established Roth. Do you think that covers it?
Permalink Submitted by Alan - IRA critic on Tue, 2022-05-17 19:09
Yes, but the 8606 is only needed for 2022 if you cure the excess by taking a distribution. I should have been more clear on that in prior post. If you resolve it through absorption, the excess is eliminated by a 5329 only. You would not actually be taking a distribution, will not get a 1099R and will not need the 8606. Now if your income in 2022 is either too high or you do not have enough earned income by the end of the year you will have to request a distribution to eliminate another excise tax for 2022, and would need an 8606 in that case.