Correcting of 2020, 2021, 2022 Roth IRA Excess Contributions

Submitted by Hung Song on Thu, 2023-02-09 00:17

Hello, I found this Forum provides great help.
My situation is complex.
1. I am age of 65 and found that my Roth IRA contribution of $7000 each in 2020, 2021, and 2022 was wrong. I am trying to return of Roth IRA contribution of $7000 each year now.
2. For tax year 2022, I contributed $7000 to Roth IRA on Feb 3, 2023 and requested $7000 return to my brokerage, and received $6852 back on Feb 7 after NIA.
3. For tax year 2021, I contributed $7000 to Roth IRA on 12/28/2021. I am about to request $7000 return to my brokerage.
4. For tax year 2020, I contributed $7000 to Roth IRA on 01/05/2021. I am about to request $7000 return to my brokerage.

Questions:
1. Can I file 2022 tax return with 5399 before 4/15/2023?
2. When should I request Return of 2021 Roth IRA Excess contribution of $7000 and file 1040x with 5399 for $420 penalty?
3. When should I request Return of 2020 Roth IRA Excess contribution of $7000 and file 1040x with 5399 for $840 penalty?
4. Any order of requests? Return of 2021 Roth IRA excess contribution first, and then Return of 2020 Roth IRA excess contribution?
5. How to report 1040x and Form 5399 with penalty for 2020 and 2021? I am using TurboTax, but have a hard time to understand. For 2022, TurboTax says I create Form 5399 for 2023 and file Fed tax of 2022. For 2021 and 2020, I need 1040x. I think it is right, but filing 5399 is complex to understand.
6. Any help can be appreciated. Hung



Submitted by Alan - IRA critic on Thu, 2023-02-09 02:08

  1. Yes. Form 5329 (not 5399) is cumulative so you must complete them in order, 2020 edition first, 2021, then 2022. For example, your 2020 5329 will show an excess contribution of 7000 on line 23 and 2024, and a 6% excise tax of $420 on line 25. The 7000 excess then carries over to line 18 and 22 of your 2021 5329. Line 23 is again 7000 for your 2021 excess. Line 24 will be 14,000, and you will owe 6% of 14,000 or $840 on line 25. Finally, the 14,000 on line 25 carries over to your 2022 5329 on line 18 and 22, line 23 will be 0 because you already removed the 2022 excess before the due date. Line 24 will be 14,000 with another $840 excise tax. and the 2022 5329 should be filed as part of your 2022 Form 1040 tax return.  Therefore, after you have completed the 2020 and 2021 5329 forms you can proceed to file your 2022 tax return including the 2022 5329. The 2020 and 2021 5329s should be filed together with a 1040 X for each of those years and the excise taxes for those 2 years. You can file these now but you could also file them as late as late May, but you need to complete these soon in order to be able to file your 2022 return on time. Note that line 25 also indicates that your excise tax could be lower than the above figures if your year end value of all Roth IRAs is less than the 14,000 on which the excise tax is otherwise calculated.
  2. 3. 4. You can request the distribution of 14,000 anytime in 2023,  but be sure to do this before year end. You already incurred the excise tax for year end 2022, and you do not incur another one until 1/1/2024 so you might want to leave the 14000 in until later this year since any gains will be tax free. You can just request a distribution of 14,000 as a single distribution without mentioning that these were excess contributions. Any gains on these contributions can remain in your Roth.  You will get a 2023 1099R showing a 14,000 distribution that you will report on a 2023 8606 but this distribution will be tax free because it comes from your regular Roth contribution balance.
  3. Don’t know if you can file a 1040X for past years with TTax, but if not you can do these 2 years on paper.
  4. Your 2023 return (filed next year) will also need a 5329 which will show 14,000 on lines 18, 20, and 21. Line 22 will be 0 showing that the 14,000 distribution you will take will eliminate your excess amount. There will be no excise tax for 2023, nor any income tax for the 14,000 distribution on Form 8606. 
  5. Note: You removed the excess for 2022 less a small loss so there is no excise tax for your 2022 contribution, but there is an excise tax for the 14000 of prior year excess contributions that were not removed by the end of 2022. Your excise taxes will total to 2100, and it’s possible that the IRS will bill you late interest for late payment of the 2020 and 2021 excise taxes. 


Submitted by Hung Song on Thu, 2023-02-09 05:24

Thanks much for your great explanations and I will try file them properly.Hung 



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