Roth IRA excess contribution from 2019
I made a Roth IRA contribution $6k in 2019 but was ineligible due to AGI. I paid the 6% excise tax in 2019 and 2020. For my 2021 tax return, I have distributed the $6k out (as of 3/1/22) so I won’t have to pay the excise tax for 2021. My financial institution is telling me that they can’t distribute the earnings on the 2019 excess contribution. Is this correct? My understanding is that the earnings need to be distributed and included in income in the year the excess contribution was made (2019).
thanks,
john
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-17 16:43
Your FI is correct. Also, in order to avoid the 2021 excise tax you must have taken the 6k distribution by the end of 2021. Since you took the distribution in 2022, you owe the 6% for 2021 on a 2021 5329, and will also have to file a 2022 5329 that will have no penalty but will show your distribution as eliminating the excess in 2022.
When you owe the excise tax, earnings stay in the Roth. Earnings are only distributed if you remove the excess by the due date for the 2019 return. That deadline was 10/15/2020. Since you removed the excess well after the extended due date, you owe the excise tax, but any gains stay in the Roth and are not currently taxed. It is possible that your gains were large enough that not having them distributed subject to tax and penalty will offset much of the excise taxes due. Also, if your income was low enough in any year after 2019 to allow a Roth contribution, Form 5329 would apply it if you did not make a separate Roth contribution. This all happens if you correctly complete the 5329. Ignore this is your income remained too high for 2020-2022.