Disallowed Roth contributions
Taxpayer’s income was too high for Roth IRA contributions they made in 2019, 2020 and 2021. 2021 I understand they can recharacterize to a non deductible IRA and amend their return (they already filed) to include the 8606. But the 2019 and 2020 contributions need to be removed and a 6% penalty for each tax year end they were in the IRA. My question is how do they report the 6% penalties? Would that be a 5329 filed with their 2021 return or do they have to go back and amend 2019 and 2020 returns? Does the IRS ever waive the penalty for an excess and how would you ask for a waiver?
Permalink Submitted by Alan - IRA critic on Thu, 2022-04-14 15:22
For both 2020 and 2021 they need to file a 1040X with a Form 5329 and remit the 6% excise tax with the 1040X. The IRS does not have authority to waive excess contribution excise taxes, and they may or may not bill late interest for the late payment of these excise taxes. For 2021, they have a choice to recharacterize the contribution and do a back door Roth conversion if they have no pre tax non Roth IRA value. They would only pay conversion taxes if there were gains included in the recharacterization transfer. Or they could simply request a return of the excess for 2021 if the back door conversion will not work. If they recharacterize 2021, they will need to file a 1040X with a 2021 5329 to pay the 6% and an 8606 to report the TIRA non deductible contribution. They should also include an explanation of the excess contribution return or rechacacterization in the space provided on the 1040X. Since the excise tax is cumulative, the 6% for 2019 would be based on the 2019 excess only, the 2020 on the total excess of 2019 and 2020, and the 2021 on the same total as 2020. The distribution of the excess will be reported on a 2022 8606 and 5329 next year and there should be no tax or penalty with the 2022 return.