Excess Roth IRA Contribution in Prior Years

Submitted by Eric Wang on Mon, 2021-03-15 14:53

In March 2020, I made max $6000 contributions for both 2019 and 2020 tax years to (mistakenly) my Roth IRA account. I am not eligible to make direct contributions to my Roth and usually use the backdoor Roth IRA method. In preparing my 2020 tax return yesterday, I realized the error and quickly recharacterized my 2020 contribution from Roth to TIRA.

For the 2019 contribution, what are my options if I am past the October 15 2020 deadline? Can I only withdraw the $6000 excess IRA contribution from my Roth and be subject to both the 6% excess and the 10% withdrawal (I have not reached 59.5 years yet)? If so, do I need to file an amended Form 5329 for 2019?

Or, since it is before April 15, can I withdraw my 2020 contribution (after recharacterizing to TIRA), apply the 2019 excess contribution to 2020 and avoid the 10% withdrawal hit?

Thanks for your help.



Submitted by Alan - IRA critic on Mon, 2021-03-15 18:58

Since March 2020 was the market bottom, if your IRA is invested in stock instruments, paying the excise tax on your 2020 contribution may have been preferable to recharacterizing it, then paying tax on the gains when you back door the recharacterization into your Roth. Do you have an idea of what the gains were, and if large (> 25%) could you still stop the recharacterization? Or has it already been processed?
Your last paragraph will not work because you cannot apply your 2019 Roth excess to 2020 because you do not qualify for a Roth for 2020. Doing so would create another year of excise tax on the 2019 contribution.

Submitted by Eric Wang on Mon, 2021-03-15 22:46

For unknown reasons to me, I left the March 2020 contribution largely in cash so didn’t have any benefit in any market gains. Think I was waiting for a further drop that never happened.
For the last paragraph, thanks – a carryover of excess contribution from a prior year to the next year has to be of the same IRA-type. THANKS SO MUCH FOR YOUR HELP

Submitted by Alan - IRA critic on Mon, 2021-03-15 23:05

Note that the gain or loss on a specific contribution is determined using the entire IRA balance, not just the investment made with that contribution. In other words, if you left the contribution in cash but a significant portion of the account you made the contribution to was in stock related investments, you would still have a large gain. Once the recharacterization is processed you will know your amount of gain or loss as determined by the custodian’s software program, but by then any gain would be transferred to your TIRA as TIRA gain.

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