Excess Roth IRA contributions from 2015-present

Submitted by Frank Coutavas on Thu, 2022-08-18 15:23

Hello and thanks in advance for any advice.

Realized I’ve been making excess contributions to my Fidelity ROTH IRA since 2015! 40-year-old married to and living with an NRA spouse abroad and realized I’m over the MAGI threshold for MFS filers ($10,000). Everything I have contributed has been in excess.

I know I can still fix 2021-2022 contributions if I remove the contributions and earnings before October 15, 2022 and thus avoid the 6% excise tax on excess contributions. Though not sure about the 10% early distribution penalty?…

But for 2015-2020, Fidelity says I should consult with a CPA to see how they should code it on the 1099-R. Something about reporting it as either a return of excess or an early distribution. I’m not sure if they have to go back and correct the 1099-R’s from those years? If I have to amend my returns….

Any advice or ideas would be greatly appreciated!



Submitted by David Mertz on Thu, 2022-08-18 16:11

  • For the distribution of the 2015 through 2020 excess contributions, the distribution is a regular distribution of the excess, code J on the Form 1099-R.  This will be a nontaxable distribution of contribution basis.
  • If there were no distributions prior to 2022, there would be no Forms 1099-R for those years.  There is also nothing for Fidelity to correct with regard to Forms 5498.  Each year’s Form 5498, including the 2022 Form 5498, should show the amount of contributions made for each of the years.  The fact that these were excess contributions or the fact that some of them were returned does not affect the reporting on Forms 5498.
  • You’ll have to pay 6% excess contribution penalties for 2015 through 2020 by filing Form 5329 for each of those years.  If you made the Roth IRA contributions equal to the annual limit for each of those years, the total penalty will be 6% * ($5,500 + $11,000 + $16,500 + $22,000 + $28,000 + $34,000 + $34,000) = $9,060.  There will be no 6% excess contribution penalty for the 2021 and 2022 contributions if they are returned, but there will be a 10% early-distribution penalty on the earnings that are required to be distributed along with those returned contributions.
  • Instead of doing a return of the 2021 and 2022 Roth IRA contributions, you could instead request that Fidelity recharacterize those to be traditional IRA contributions, which may or may not be deductible depending on whether or not you are covered by a workplace retirement plan.  You could then convert those funds to Roth if you desire, with the taxable amount of the conversion depending on how much in other funds you have in traditional IRAs.

Submitted by Frank Coutavas on Thu, 2022-08-18 17:56

Thank you so much for this valuable information! It really helps. I’m married to an NRA and was told that if I die, 30% of the proceeds from the IRA will be withheld if she lives outside the USA. So I’m not planning on leaving funds in any kind of IRA and trying to figure out a different plan for my retirement.Publication 590-A, page 42, last sentence says under Withdrawal of excess contributions: The earnings are considered earned and received in the year the excess contribution was made.Since I’ve made excess contributions every year since 2015, I understood this to mean that I would have to pay the 10% early-distribution penalty for each year I made the excess contributions separately. So would I have to file 8606 for those years, even though I didn’t make the distribution until now?Also, Fidelity is telling me I have to fill out a separate form to request the return of excess for each year.But you’re basically saying that the distribution works like this, right?2021-2022: Excess contributions and earnings2015-2020: only excess contributions (any earnings come out in 2021-2022)And that it all goes on the corrected 1099-R from 2021? Does that sound right?Also, would I have to fill out form 8606 when I amend my return from 2021?Also wondering if I report all the earnings from the distribution on my amended 2021 return? Or do I wait until 2022? Thanks!     

Submitted by David Mertz on Thu, 2022-08-18 20:20

  • That section of “Withdrawal of excess contributions” is referring to a return of contribution before the due date of your tax return, what you would be doing with the 2021 and 2022 contributions, not the 2015 through 2020 contributions.
  • Form 8606 is only needed with your 2022 tax return, the year that you make the regular, code-J distribution of the 2015 through 2020 excess contributions, on which you’ll show your contribution basis (and the amount of the distribution) as the total amount contributed for 2015 through 2020 to reduce the taxable amount of this distribution by the amount of your 2015 through 2020 contributions.
  • Three requests need to be made to Fidelity, an explicit return of the 2021 contribution, an explicit return of the 2022 contribution and a regular distribution of the total of the 2015 through 2020 excess contributions.
  • You’ll receive three 2022 Forms 1099-R, one with codes J an P for the return of the 2021 contribution, one for codes J and 8 for the return of the 2022 contribution, and one with code J for the regular distribution of the total of the 2015 through 2020 excess contributions.  The earnings on the 2015 through 2020 excess contributions remain in the Roth IRA (although it’s not clear that that’s permitted if you never made a permissible Roth IRA contribution prior to 2015; if you were never eligible to make a Roth IRA contribution it might be more proper to distribute the earnings as well, which would be subject to tax in early-distribution penalty, but I don’t recall ever seeing specific IRS guidance on this)
  • The amendment of your 2021 tax return would only be to report the taxable earnings shown in box 2a of the code JP Form 1099-R for the return of the 2021 excess contribution.  The earnings shown in box 2a of the code J8 Form 1099-R for the return of the 2022 excess contribution are taxable on your 2022 tax return.

Submitted by Frank Coutavas on Fri, 2022-08-19 19:24

  • Interesting. Thanks so much for the helpful info. Since I plan on closing the IRA, I’m planning on requesting them to distribute the earnings from 2015-2020 as well. Would that result in a 1099-R for those years? Is it even possible to distribute those earnings now? They’ve gone up and down so much since then!
  • Sorry for my ignorance, and thanks again for helping me understand! 🙂

Submitted by David Mertz on Fri, 2022-08-19 22:55

  • After obtaining the returns of the 2021 and 2022 contributions, you’l simply request a regular distribution of whatever remains.  That will be reported on your 2022 tax return and will be included on 2022 Form 5329 line 20, reducing the excess to zero.  This will also appear on Form 8606 Part III where the amount of taxable earnings is calculated by subtracting your basis from the 2015 through 2020 contributions.  The taxable amount is also subject to the 10% early-distribution penalty on Form 5329 Part I.
  • I corrected my calculation of the total excess contribution penalty in my earlier post.  I originally failed to include the $34,000 excess for 2021.  Adding this increases the total excess-contribution penalty from $7,020 to $9,060.

Submitted by Frank Coutavas on Sun, 2022-08-21 21:01

  • Thanks again for the helpful information. I just have one more question for you!
  • I also realized that I could/should have been taking the FEIE since 2015. That means I overpaid income tax for those years. Hoping that will offset the 6% tax when I go back and amend. Think it’s possible?
  • Also, good thing is that I only invested a little in the IRA, so your calculation of the 6% is a little high thankfully!

Submitted by David Mertz on Sun, 2022-08-21 22:41

  • Tax years prior to 2019 are closed tax years. You can still amend 2019 and 2020 (and 2021 if you already filed that) to obtain a refund (or use the difference to offset that year’s penalty).
  • I’m glad to hear that the amount is less than the worst-case scenario that I calculated.

Submitted by Frank Coutavas on Mon, 2022-08-22 13:23

  • Ahh, so in other words, they’d be happy to assess the penalty for 2015-2018, but not to take into account any overpayment for those ‘closed’ years. 🙂
  • I’m trying to figure out if it’s worth it to go back and amend those returns…. You think they could maybe be considered “re-opened” since I have to file Form 5329 for each year (2015-2018)?
  • I asked someone at the IRS about this over the phone, and she said “Well, we’ll have to see how they’re gonna treat that”. So no concrete answer.
  • One other question. Above you mentioned that the distribution of whatever is left (from 2015-2020) would be reported on Form 8606 Part III… For which year? For 2022 right?

Submitted by William Tuttle on Mon, 2022-08-22 17:37

  • You can not amend the 2015-2018 returns. Form 1040 and associated Schedules and Forms have a three (3) year SOL.
  • Form 5329 has no SOL for failure to file.

Submitted by David Mertz on Mon, 2022-08-22 18:50

  • Adding to spiritrider’s reply, the reason that the statute of limitations on assessing the excess-contribution penalty is separate from that of the Form 1040 is that Form 5329 is considered to be a separate tax return.  Because From 5329 is a separate tax return, the statute of limitations clock for the penalty does not start to run until a Form 5329 for the particular year is filed.
  • Regarding reporting the regular distribution, yes, it’s reported on the Form 8606 for the year in which the distribution occurs, which in this case should be 2022.

Submitted by Frank Coutavas on Mon, 2022-08-22 20:44

Thank you!

Submitted by Frank Coutavas on Fri, 2022-09-02 16:10

  • Hello again! Thanks once more for your informative responses. Another question has come into my mind and I was wondering if I could impose maybe just one more time.
  • I filed Form 8880 with my 2015-2018 tax returns (Credit for Qualified Retirement Savings Contributions). Since my Roth IRA contributions were in excess, I understand that I wasn’t supposed to take this credit.
  • Do you think the IRS will realize that and reverse that credit, even if I don’t amend the returns from those years? By the way, when I use the IRS’ interactive tax assistant “Should I file an amended return?” tool for the year 2018, it says I should file an amended return.
  • Though it also says “To claim a credit or refund, you must file Form 1040-X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later.”
  • Thing is, there would be changes for that year that would both decrease and increase my tax liability. From what I understand though, if I do file amended returns from those years, they’ll only probably only take into account the changes that increase my tax liability, like the credit from Form 8880. Does that sound right?
  • Thanks for any insights you can give me!

Submitted by William Tuttle on Fri, 2022-09-02 23:57

  • The standard SOL for income tax returns is the latter of three years from the tax filing deadline (04/18/18) or the actual filing date.
  • It is six (6) years for an understatement of income > 25% and forever on fraud.
  • Form 5329 is a separate return with no SOL.
  • I do no know how an ineligible credit factors into the SOL.

Submitted by Alan - IRA critic on Sat, 2022-09-03 00:32

  • I believe that the 3 year SOL applies to the credit taken on Form 8880. Therefore, you are under no obligation to amend your return to remove the credit. The IRS tool recommending an amended return has probably not been updated for the 4/15/2022 closure date for 2018 returns, assuming you filed that return on time.
  • The removal of the excess contributions required to end the 6% annual excise tax assessment is treated as a line 4 reduction for purposes of any more recent Forms 8880. There is a 3 1/4 year testing period over which such reductions would reduce any eligible contribution amounts for more recent  Savers Credit years since such excess contributions were not removed by the extended due date for any of the 2015-2018 IRA contribution years.

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