Roth IRA withdrawal of contribution, and re-contribution
In 2021 I made my $6000 Roth IRA contribution (income under the limit for direct contribution) for the 2021 year. I have now taken this $6000 back out (January 2022) as a “return of excess contribution” to meet unexpected expenses, as well associated capital gains (~$1200) which I understand is required in conjunction.
My understanding is that I am still able to make my full $6000 contribution for 2021, but my question is by when does this have to be re-contributed? April 15? Or perhaps October 15, if I file for an extension?
Also, I understand that I will have to pay tax and 10% penalty on the $1200 gains, and no tax nor penalty on the $6000 return of contribution. My question is whether these gains are taxed as income or as capital gains (would be STCG anyway so doesn’t really matter in terms of rate, but would still like to understand), and more importantly, for which year are these taxes due? 2021, or 2022?
Essentially, is this $1200 counted as income for 2021 (year in which associated contribution was made) or for 2022 (year in which the gains were actually withdrawn/realized)?
Finally, I understand that I will be receiving form 1099-R from Vanguard. What other forms will I need to fill out for this whole situation, in the scenario where I am able to make the re-contribution of $6000 by the proper deadline, and also in the scenario where I make no further re-contribution (so just return of original $6000 contribution and withdrawal of associated $1200 gains).
Any help on this would be greatly appreciated, thank you so much!
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-18 23:25
Yes, you can re contribute for 2021 until 4/18/2022. The trade off for the opportunity to re contribute is the tax and penalty on the 1200 of earnings that were distributed to you. SInce the first contribution was made in 2021, the earnings and penalty will be due on your 2021 tax return, even though you will not receive the 1099R until Jan, 2023 and it will be coded to show the gain as taxable in 2021. You will have to include an explanatory statement regarding the returned contribution with your 2021 return and add the taxable income on line 4 of Form 1040.
There are no cap gains in IRAs, and all distributions that are taxable are taxed at the full ordinary income tax rates. Sch D or Form 8949 do not apply to IRA distributions. You do not have to complete any additional forms whether you re contribute or not, as Roth contributions are not reported on your return. However, you do not need to include the explanatory statement referred to above so the IRS will know that you had a contribution returned and therefore did not make two contributions to your Roth IRA.
Of course, had you not requested the specific return of excess and just withdrew 6000, there would be no tax or penalty, but you would not have been able to recontribute unless you were able to do a 60 day rollover of the 6000 back to your Roth IRA.
Permalink Submitted by Kyle Prochno on Sat, 2022-02-26 23:43
What additional forms am I required to file for my tax return in the following situations:
Withdrawal of $7200 from Roth IRA in 2022 (<59 years old), of which $6000 is 2021 contribution and $1200 is earnings
Withdrawal of $6000 from Roth IRA in 2022 (<59 years old), of which all $6000 is 2021 contribution
I understand that in the first exmaple, the $1200 of earnings is subject to both income tax and 10% penalty. I also will not receive Form 1099-R until January 2023 as mentioned in the previous response, but without the specific information it contains it’s a bit difficult to know exactly how to proceed in filling out the Substitute 1099-R. I believe that form 5329 would need to be filed for the first example, due to the tax and penalty on $1200 earnings; and that form 8606 would need to be filed in both examples, due to a withdrawal/distribution being made from a Roth IRA. Or does the withdrawal of “excess” contribution (how I categorized this at Vanguard) negate the need to file either the 8606 and/or the 5329? Any help would be greatly appreciated! Thank you.
Permalink Submitted by Alan - IRA critic on Sun, 2022-02-27 02:07
Form 5329 is not needed for the first example – the 10% penalty on the gain goes directly on line 8 of Sch 2 of Form 1040. Neither is Form 8606 needed to report the return of a specific year’s Roth contribution. However, an explanatory statement regarding the distribution is needed.
The second scenario does not include any gain or loss, and therefore if just 6000 is requested to be distributed, it would be reported on Form 8606 as coming from the regular contribution balance in the account, and would be tax and penalty free. No 5329. However, this 6000 distribution in 2022 would correct a 2021 or prior year excess amount up to 6000, but it would not eliminate a prior year 6% excise tax. For example, if you made a 6000 2021 excess and removed 6000 in 2022 as a normal distribution, there would stll be an excise tax for 2021, but not for 2022. Basically, you would eliminate tax and penalty on the 1200 of earnings but you would be trading that savings for the 6% excise tax (360).