Roth Excess Contribution and gains then losses over two years

Submitted by Philip Muller on Fri, 2023-02-24 18:41

My daugther for 2021 was not allowed to contribute $6,000 to a ROTH since she married and her joint income was too high , and can no longer contribute to a ROTH currently .
I believe that she should do the following but we would like any advice :

1. Remove the $6,000 excess before April 2023 and it should not be treated as an early distribution subject to taxes and 10% early distribution penalty.

2. Fill out form 5392 for 2021 and pay 6% penalty $360.
2.a However, I am not sure if this must be a 2021 form and if it can be filed itself without amending the 2021 return

3. Fill out form 5392 for 2022 and pay a second 6% penalty of $360 and file this with the 2022 return in April 2023.

4. Finally, She had about a $800 gain on this 2021 excess in 2021 but a $1000 loss in 2022 associated with this excess contribution.
4.a Since this is a net loss over two years do we not have to do anything, or does she need to also have to withdraw the $800 gain for 2021 and treat it as an early withdrawal (and pay taxes and 10% penalty).

Please help me help her. thanks



Submitted by Alan - IRA critic on Fri, 2023-02-24 19:56

  1. She should request a 6000 distribution before year end to avoid another excise tax for 2023. Distribution does not need to be completed by 4/18. In requesting the distribution, there is no need to mention an excess contribution since the extended due date for 2021 contributions has passed.
  2. The Form # is 5329 (2021 edition) and this is sometimes accepted stand alone. But to be more sure it will not be kicked back, best to attach it to a 2021 1040X. $360 is the correct excise tax.
  3. Correct. Note that the 2022 5329 will show the excess from 2021 carried over to line 18 of the 2022 5329.
  4. Ignore any gain or loss, since the correction is after the extended due date. Only 6000 needs to be distributed.
  5. She will get a 1099R for 2023 for 6000 and this distribution will be reported on her 2023 return on Form 8606. Since the distribution comes from her regular contribution balance it will be tax and penalty free. She will also need to file a 2023 5329 to show that the 6000 distribution has eliminated the excess. There will be no excise tax due for 2023.
  6. The IRS may or may not bill late interest on the $360 excise tax paid late.

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