Roth IRA Excess Help – 2021, 2022, & 2023

Submitted by ZPeter on Wed, 2023-05-17 21:07

To begin, my wife and I live overseas. This means that our extended deadline to file taxes is June 15. We need to do a withdrawal of excess contribution, and I don’t think we’re able to recharacterize it or anything, since our problem is too low of income rather than too high.

In 2021, my wife made an excess contribution of $2,428 to her Roth IRA. We had joint self-employment income of around $3,472 (which was our AGI) and she contributed $5,900 I believe. I didn’t contribute anything to a Roth IRA. We filed married filing jointly.

In 2022, she made an excess contribution of $6,000 (we weren’t aware that you couldn’t make contributions with money deducted using Foreign Earned Income Exclusion, and we didn’t have other income).

For 2023, she has contributed $400 so far, but we’ve stopped contributions and will get those excess+gains (or minus losses) removed.

I’ve found a lot of information about what to do but not a lot about how to do it and file our taxes correctly. I think:

1. For our excess contribution in 2021: we remove the excess contributions (not including gains/losses), and do a 2021 amended return with form 5329 with the excess contributions that were withdrawn. Then, we file form 5329 with our taxes for 2022 (before the extended deadline), and pay the 6% for both 2021 and 2022. If I’m correct I think we’ll need to submit the amended 2021 tax return before filing the current 2022 tax return.

NOTE: The excess contributions in 2021 were a prior-year contribution that happened in January 2022 if I remember correctly. We made contributions that were eligible throughout the year, then added more in January of 2022. Our contribution for 2021 and 2022 happened around the same time. Does that change anything? Could those excess contributions for 2021 possibly count as a 2022 excess contribution rather than 2021 and save us that 6% fee (since the money was added in 2022)?

2. For our excess contribution in 2022: we remove the excess contributions (the account had a loss, so we’d subtract the losses from the 6k we over-contributed and remove whatever that number is) and we put the total amount of the withdrawal on our 1040 line 4a (and don’t think we put the losses anywhere). And we include a statement explaining the withdrawal (I’d mention the loss here I suppose). Since it would happen before our extension and we had losses, we don’t pay anything on this. And I don’t think we need to file form 5329 for this excess (but will need to file form 5329 for the 2021 excess with this return). Is that all correct?

3. For excess contribution in 2023: I think we can basically follow the same structure as 2022 excess, but we’ll file it next year. I suppose we can do the Net Income Attributable calculation in the same way as for the 2022 excess, and can remove them at the same time? Is that when I file form 8606, or do I need to file that this year? Here, I think I need to file form 5329 one more time to show that the excess is removed and no more fees are due.

My questions:

I know we need our broker to file the ‘return of excess contribution plus gains (or minus losses)’ to the IRS for us to withdraw the 2022 and 2023 excess contributions. But for the 2021 excess, do we need to file the same ‘return of excess contribution’ form or can we do a regular withdrawal?

Since our combined AGI (from self-employment income) was $3,472 for 2021 and I didn’t contribute to an IRA, my wife was able to contribute up to $3,472 to her IRA, right?

I suppose the expat filing extension applies in this case to removing Roth IRA Excess contributions? As it says you need to remove all excess contributions before the tax deadline including extensions in order for the contributions to be treated as if never contributed, and so avoid the 6% fee (in Instructions for form 8606)

Do we need to file from 8606 for our 2021 or 2022 excess contributions? If so, for what year? Do we just file it next year (for 2023 taxes) as we’ll be making a withdrawal this year?

What about form 1099-R? I think after getting the excess contributions withdrawn we’ll receive that in January of next year. Do I need to file that for this year, or next year, or do an amended return? Or what?

Are there any other forms to file for this?



Submitted by Alan - IRA critic on Wed, 2023-05-17 23:10

  • Removal of the 2021 excess can be done as a regular distribution. Just ask the custodian to distribute the excess amount in dollar terms. No need to even mention an excess contribution. This must be reported on Form 8606 and is usually a non taxable return of Roth regular contribution basis. Be sure you correctly determine her allowed contribution, which is her net earnings from SE less 1/2 SE tax due. The excess of that figure is the excess contribution.
  • The 2022 and 2023 removal of excess adjusted for earnings must be completed by the due date or by the extended due date if you either file by 6/15 or file an extension by 6/15. Do not calculate the NIA yourself unless the custodian asks you to. Most custodians have software that calculates the NIA right up to the date of removal. Your paragraph #2 is entirely correct except for the custodian normally calculating the NIA.
  • Form 8606 is not needed for a return of excess by the due date or extended due date, so only needed for the removal of the 2021 excess.
  • Remember that any 8606 or 5329 form required is separate per spouse, and only holds one SSN.
  • Removal of the 2022 and 2023 excess contributions should be described with an explanatory statement added to the returns for those years. Since the 2022 excess is being corrected in 2023, the 2022 return will only need the 5329 forms and the statement. The 2023 return of excess should be reported on line 4a and 4b of Form 1040 (if any taxable gains). There is no longer a penalty on any gain amount, just ordinary tax.
  • Complete the 5329 forms for each spouse as applicable by order of year (2021 first, then 2022 etc since these forms carry over the remaining excess until eliminated. A 2023 5329 will be required just to document that the 2021 excess has been removed. The last 6% penalty will be on the 2022 5329 for the 2021 excess.

 



Submitted by ZPeter on Thu, 2023-05-18 05:03

Thank you so much. That’s very helpful. 

  • Firstly, wouldn’t my 2022 excess (being corrected in 2023) be listed on my 2022 tax return on line 4a and 4b, along with the statement? Rather than being listed on form 5329 (as it says in the instructions for form 8606, and it says that if removed by tax deadline the contributions are treated as if not contributed)? Then, I thought my 2023 excess (withdrawn this year and filed next year) would also be listed in line 4a and 4b for next year’s return.
  • Regarding self-employment income, it would be our combined self-employment income, right? Since our other income is excluded due to the Foreign Earned Income Exclusion, I believe that’s just our combined AGI (which is our net income minus 1/2 of SE taxes).
  • I’ve also seen elsewhere that 8606 isn’t needed to be filed for any of the withdrawals, as they’d instead be filed on 1099-R’s that I would receive next year. Any thoughts on that?


Submitted by ZPeter on Thu, 2023-05-18 13:13

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Submitted by Alan - IRA critic on Thu, 2023-05-18 16:15

  • Yes, you are correct that the returned 2022 contribution should be reported on line 4a and 4b if applicable of your 2022 return. Likewise for 2023.
  • Regarding 2021 SE income, the taxable comp could be your AGI if you have no other income other than the SE, eg no interest or investment income etc. There is also a question how you are reporting the SE income if jointly operated. While not a subject of this forum, since you are probably not using Form 1065 (Partership), you probably need to file a Sch C and SE for each spouse. And since her contribution will require a spousal contribution because you are using combined SE income and a spousal contribution can only be made to the IRA of the lower earning spouse, her allowed contribution will be limited if YOUR Sch C income happens to be less than hers. I don’t think that you can file a joint Sch C. If you can treat the entire SE income as hers and show her SSN on Sch C and SE, that would resolve this issue.
  • 1099R forms are not filed with your return as they just indicate what you would otherwise need to report. Form 8606 for each applicable spouse is needed to report non qualified Roth IRA distributions OTHER THAN a timely return of excess. The 2021 excess (once you determine exactly what that is) is being withdrawn after the due date and is not “timely”. Therefore, you need to report this distribution for which a 1099R will be issued on a 2023 Form 8606 for her. Again, this should not be taxable, but will reduce her remaining Roth IRA contribution basis. 


Submitted by ZPeter on Thu, 2023-05-18 19:18

Thanks again, so much, for your help.

  • Her SE income for 2021 was less than mine, as we were self-employed separately (not in a partnership). We have separate Schedule C’s. Adding our SE income together we reach our combined AGI, and as I mentioned, I didn’t contribute anything to a Roth IRA. My SE income was $2,022 and hers was $1,714 – so our AGI (SE income minus 1/2 of SE tax) is $3,472. Does that all sound okay? 
  • So – we would report the 1099-R that we recieve in January 2024 on form 8606, rather than filing form 1099-R as it’s given? And that 8606 would be filed for tax year 2023, rather than an amended return for 2022?


Submitted by Alan - IRA critic on Fri, 2023-05-19 01:33

  • Since her Sch C income is less than yours, she can receive a spousal contribution from your Sch C income, which means you are OK with her allowed Roth contribution. But I don’t follow your math – if net earnings prior to the SE deduction is 3714, 92.35% of that is 3,430. which is her allowed contribution.
  • Only report on Form 8606 (Part III) for 2023 the 1099R received next January for the 2021 excess removal.  The other 1099R forms are not reported on an 8606. 


Submitted by ZPeter on Fri, 2023-05-19 06:34

  • Our SE net income was $3,736 ($2,022+$1,714). Our total SE tax is $528 ($286 for me, $242 for her). Our AGI $3,472 (which is net income – 1/2 SE tax (or, 3736-264 = 3472). Wouldn’t, then, $3,472 be her total elible Roth IRA contributions? 
  • So – 1099R recieved for 2021 excess removal we report on 8606. And the other 1099R we recieve (I suppose for the 2022/2023 excess removed) we report on 1099R. 

 Thanks a ton – this is so helpful. 



Submitted by Alan - IRA critic on Fri, 2023-05-19 14:39

  • The SE tax rate is 15.3%, so 1/2 is 7.65%. This rate is due for all of your net earnings whether excluded by the FEIE or not. Is a tax program producing your result?
  • Correct re the 2021 excess removal, once we determine the exact excess amount, which would be a little higher after deducting 7.65% of the net earnings (1/2 of SE tax). For the 2022 and 2023 excess removals which will each be reported on their own 1099R form, you would enter the Box 1 amount on line 4a of Form 1040 of the applicable year. If any gains were included, they go on 4b. You do not file the 1099R itself, the IRS gets their copy direct from the Roth custodian.


Submitted by ZPeter on Fri, 2023-05-19 15:27

  • None of the income excluded by FEIE was taxed with SE tax (as it wasn’t SE, it was other foreign income). And yes, I used a tax program for that year and it calculated:
  • For me: $2,022 as total income, with $286 as total SE tax (calculated with software on Sch SE)
  • For her: $1,714 as total income, with $242 as total SE tax (calculated with software on Sch SE)
  • Combined Total: $3,736, with $528 as total tax (already paid last year)
  • On Form 1040, it lists: total income as $3,736; adjustments to income from sch 1 line 26 as $264, AGI as $3,472
  • Based on that, I’d suppose $3,472 would be the allowed Roth IRA contribution for her. But, 3736 x .9235 = 3450. So – now I suppose I’m not sure.
  • So, you’re saying that although the broker/Roth custodian files 1099-R for me and I’ll recieve one in January 2024, I don’t need to file it. Only on 8606 (for 2021 excess) and lines 4a/4b for 2022 / 2023 return. Correct? I’ve seen other comments during research that mentions the need to file the 1099-R’s and code them properly for the given year. Any thoughts on that?


    • Submitted by David Mertz on Fri, 2023-05-19 14:57

    • $3,472 is the correct amount for your wife’s maximum IRA contribution for 2021 based on your combined SE income.  Because your wife has the lower compensation, she qualifies to use your compensation as well as her own to support her IRA contribution.  (Since you say that this is the only SE income, the assumption is that the foreign-earned income is not subject to SE tax.)
    • $3,736 – ($3,736 * 0.9235 * 0.153) / 2 = $3,472 (rounded)


    Submitted by ZPeter on Fri, 2023-05-19 15:29

    Thanks for the response!



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