2020 excess ROTH contribition
Client just brought me a Form 5498 that shows they made ROTH IRA contributions in 2020. They did NOT have earned income in 2020 so the contributions are disallowed. They do not have earned income in 2021 either, so rolling them forward is not an option. The client has gone to their financial advisor and are getting the contributions and earnings removed now.
I know that I need to have the client file an amended return with form 5329 for 2020. My question, since they are removing the funds now, do we still need to file the form 5329 with the 2021 tax return? Everything I see says remove by the tax filing deadline, plus extensions. The original deadline is well past, so 2020 needs amending. But, does that apply to each consecutive year?
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-06 02:15
Once the extended due date has passed for an excess contribution removal, the excise tax replaces the removal and taxation of earnings. In this case a 2020 1040X with Form 5329 to pay the 6% excise tax must be filed and another 6% excise tax is due for 2021 which can be paid with a 2021 5329 added to the 2021 return if not yet filed. The corrective distribution should just be requested in the dollar amount of the contribution with no mention of an excess contribution, a tax year, or earnings. Any earnings remain in the Roth. The returned contribution done now will cure the excess and stop the excise taxes at 2 years (2020 and 2021). The returned contribution will have to be reported on Form 8606 for 2022 for income tax purposes, but since the excess is coming from the regular Roth contribution balance, it should be non taxable. The IRS may or may not charge late interest for late payment of the 2020 6% excise tax.
Permalink Submitted by Charles Foster on Sun, 2022-04-10 16:55
Alan – thank you! I really appreciate the input.