2019 excess correction withdrew contribution but not earnings

Submitted by Ryan J on Fri, 2021-05-14 03:09

Hi, in 2019 I made an excess contribution of $6,000 that I found out was over the limit when filing in 2020. That same year I withdrew the contribution manually, not knowing my broker had a special form for removing excess contributions, meaning
1. I did not withdraw the earnings from the contribution, and still haven’t yet
2. my 1099R marks my withdrawal as a distribution with code J (Early distribution from a Roth IRA, no known exception)

What should I do here? It seems like if it weren’t for #1, I could just file 8606 and not have to pay any penalty or tax (as would be expected from removing the excess on time), because, correct me if I’m wrong, my IRA basis would match the dollar value of the original contribution.

With #1, should I withdraw the excess earnings and then how does that change what I need to file?

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Permalink Submitted by Alan - IRA critic on Fri, 2021-05-14 15:35

You should have asked the custodian to return your 2019 contribution as an excess contribution, and you would have received the amount adjusted for any gain or loss. Instead, you received just an early distribution that did not correct the 2019 excess leaving you with a 6% excise tax for 2019 on Form 5329.
However, your 2020 distribution did remove the excess amount. First, you need to file the 2019 5329 and pay the 6% excise tax of $360. You can file this form by itself as it has a signature line. The 2019 excess amount carries over to a 2020 5329. Show your 6000 distribution on line 20 of that form, and it will result in eliminating your excess contribution. No excise tax due for 2020, just 2019. You also report the distribution on Form 8606 for 2020, but since the distribution came from your regular contribution balance, there is no tax on the distribution.
This might not work out too bad if your contribution would have had gains. You do pay the $360 excise tax, but any earnings remain in the Roth and would have been subject to tax and penalty if you had ordered the excess returned correctly.