ROTH IRA Excess contributions – 60 yrs old- Account held for well over 5 years

Submitted by J S on Sat, 2022-02-05 21:05

I’m 60 years old and had excess contributions to my Roth IRA for a few years. I removed all the contributions (decided to close my account) and i mailed in separate 5329’s along with the 6% tax for years i had an excess contribution. Now i am holding my breath, awaiting interest and penalty from the IRS.

question 1: Do i need to to back and amend any tax years on the earnings of my ROTH for the years the excess was in the account?

question 2: I paid 6% for tax year 2021 as well because i had an excess. Should i have done that or was i suppose to calculate capital gains during the year and not pay the 6%.

Thank you



Submitted by Alan - IRA critic on Sat, 2022-02-05 21:59

No, when you remove an excess after the due date and pay the 6% excise tax, the earnings remain in the Roth and are not taxed.  Right now, the only years for which you can remove an excess with earnings and avoid the excise tax is for 2021 or 2022 contributions.  Sometimes the IRS will want a 1040X with each 5329, but there is no functional reason for it since a 5329 itself functions as a return. Hopefully, the IRS will accept your 5329 forms by themselves. If you hear nothing, that’s good news, including any late interest charges.
For 2021, if you want to avoid the excise tax, you just ask the custodian to return your 2021 contribution and they will calculate the gain or loss and return the net. Any gains are subject to tax on your 2021 return. That said, with 2021 a banner year for stocks, if your Roth is invested such that the gain is upwards of 25% or so on your contribution, you could be better off leaving the excess in there until late in 2022 and then withdraw just the contribution amount. You will owe the 6% for 2021, but you avoid the tax on the amount of earnings that would have had to come out. Of course, you will need a way to estimate the amount of gain from the date of the contribution to the present to determine the amount of gain. If you decide the gain is not enough to warrent paying the excise tax and request a return of the 2021 excess, you can file an amended 5329 to request a return of your 6% excise tax. 

Submitted by J S on Sat, 2022-02-05 22:51

I didn’t leave any money in the IRA. It was closed early in Jan 22. This is when i discovered the mess. Do i have a choice of taking the  6% tax or capital gains for 2021.  I already sent in the 5329 for 2021 with all the rest. I would rather pay the 6%.  Contribution was 3,200. 

Submitted by Alan - IRA critic on Sat, 2022-02-05 23:06

If this was your only Roth IRA and you removed all these excess contributions, there were no gains remaining because all these excess contributions as well as any legal contributions never resulted in net gains?  Were any of the excess contributions removed prior to 1/1/2022?  Did you request the custodian to simply distribute the entire balance without referring to any excess contributions? This is an abnormal situation since excess removals rarely coincide with total account closure.

Submitted by J S on Sat, 2022-02-05 23:29

I closed my IRA and after close examination and many hours of reading i concluded that i in fact had excess contributions using unearned income going back from 2014  to 2022. I self reported the excess contributions two days ago and paid the 6% tax for each year.  I did have a distribution in 2020 which removed some of the excess but i wasn’t even aware of the problem in 2020 ! Its a mess and i just want to do the right thing. Pay my tax  and penalty and move on.  I even had a $200 contributon for 2022. I will take care of that next year. Believe me if i had a 5329 for 2022 i would have done that year too just to get it over with.  Its my fault. I thought pensions were earned income. My mistake.  This IRA forum has helped me a great deal.  

Submitted by J S on Sat, 2022-02-05 23:53

To answer your question. Yes there were gains in my IRA. I removed everything out.  Excess…gains.. everything.        I just want to ensure i do not owe on capital gains if i paid the 6% penalty for the years 2014..2015… on.and on. It is unusual.  I liquidated my IRA. It was not a tremendous amount.  

Submitted by Alan - IRA critic on Sun, 2022-02-06 03:26

Hopefully, your 5329 forms were done correctly. For each year an excess remains in the Roth you owe 6% for that excess contribution. Therefore, your 2014 5329 would show an excise tax on just the 2014 excess, your 2015 form for both 2014 and 2015 etc. etc. For 2020 you took a distribution which reduces your excess amount for 2020 and that should show on line 20 of your 2020 5329. 
In 2022 you drained the Roth IRA, but I’m not sure that included your 200 contribution. You will get a 1099R next January reporting your distribution. Note that if you made any legal (not an excess contribution) contribution prior to 2017, because you are over 59.5 your Roth is qualified and this entire distribution will be tax and penalty free, AND you will not need to report it on Form 8606. Just enter the gross distribution on line 4a of Form 1040. If you did NOT make a an allowed contribution before 2017, please advise since your Roth would then not have been qualified for the recent large distribution. This all addresses the income tax aspect, not the excise tax.
Now for the 2022 5329 you will have to complete even if there is no 2022 excise tax because this 5329 will show that you have distributed all the remaining excess amounts, and the 5329 will have no excise tax due because the year end 2022 value of your Roth IRA will be 0 (see line 25). 
You have paid your 2021 excise tax on time, so even if the IRS goes after late interest, it would not apply to your 2021 5329, just prior years. 
Forget about my prior comment about having the 2021 excess (just the 2021 contribution) returned with earnings to avoid the 2021 excise tax on that particular contribution. Since you just withdrew the entire balance (except maybe 200) in a normal distribution, the custodian cannot provide a 1099R with the special code for removing a year’s excess contribution before the due date. Without that 1099R, you will still owe the 6% on your 2021 contribution for 2021. 

Submitted by J S on Sun, 2022-02-06 04:33

Thank you so much. I truly appreciate your help.

Submitted by J S on Sun, 2022-02-06 04:40

In 2014, 2015 ,2016, 2017 2018 2019 2020 2021 2022 i made an excess contributions. I was not 59 1/2 for each contribution. I was not 591/2 until 2020. continue below:

Submitted by J S on Sun, 2022-02-06 04:54

Please advise how to handle this.

Submitted by J S on Sun, 2022-02-06 04:59

To answer your quesion about makeing legal contributions before 2017. I did make legal contributions in the years before 2017 while i was working.  I’ve had the IRA since 2004.  I retired in mid 2011 with only unearned income.

Submitted by J S on Sun, 2022-02-06 05:34

i had over 10 grand or so in legal contrubutions up to 2011 when i was working. Then in 2012, 2013 I didnt contribute. In 2014  the problem started.  I was retired on a pension. 

Submitted by Alan - IRA critic on Sun, 2022-02-06 16:09

OK – with legal contributions prior to 2014 and being 59.5, your Roth is fully qualified and any distributions including the lump sum distribution you just took are tax free. You could roll back within 60 days of receiving the recent distribution the portion of your distribution that exceeded the total of your excess contributions for those years, but you cannot roll back the excess contribution amounts that you just distributed to stop the annual 6% excise taxes.

Submitted by J S on Sun, 2022-02-06 16:38

Thank you !   

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