Excess ROTH IRA contribution in 2022
Client was advised by her financial advisor to make maximum ROTH contributions which she did. For tax year 2022 she made a $7,000 contribution and she did her own taxes and did not realize that she over contributed due to income in the amount of $4,650. I am now doing her 2023 taxes and form 5329 shows a penalty of $279. Is there any way around this penalty? In addition a $7,500 contribution was made for 2023 but once I explained to the advisor of the excess contributions he removed the $7,500 plus earnings before we would be filing her 2023 return. Do I include the $7,500 in her 2023 return or remove it as it was taken out? I assume there will not be a penalty for the 2023 year
Permalink Submitted by Alan - IRA critic on Wed, 2024-02-21 19:15
Form 5329 must be completed for prior years first because the excess contribution penalty accumulates.Client should have filed a 5329 with a 1040X for 2022 and the excise tax for 2022 was $279. The 2023 5329 should have carried the 4650 excess amount into 2023 and another 279 would be due for 2023 with the 1040. In addition the 2023 regular contribution was corrected by the due date, but any gains on the return of the 2023 contribution will be taxable in the year the contribution was made, so if the 2023 contribution was made in 2023 the amount of gain the accompanied the 7500 corrective distribution must be reported on the 2023 return on line 4b of that return. Finally, the excess amount of 4650 must be distributed before the end of 2024 to eliminate the excess. The 2024 return will include Form 8606 to report this distribution (should be tax free) and a final 5329 for 2024 will show that the 4650 distribution eliminated the excess, so no 2024 excise tax will be due. To be clear, if the original excess of 4650 was not removed by 12/31/2023, there will be a 6% excise tax due for a second year on the 2022 excess. The timely removal of the 2023 excess avoids an excise tax on that amount, but does not eliminate the excise tax on the 2022 excess for 2023 as well as 2022.