Excess Roth Contributions Since 2020

Submitted by Krista McBeath on Mon, 2023-04-03 16:07

I have just acquired a client who has a mess; she and her husband have each been fund Roth IRAs and we have determined that they have been ineligible since 2020. He is 56 (7/25/1966) and she is 59 (08/07/1963).

I am familiar with how to calculate and remove excess contributions and earnings, but I have never had to go back more than a year or two for a client. When I compute the corrective distribution for 2020, I feel like when I prepare my adjusted opening balance calculation for 2021 that I should also adjust and add in the amount of the corrective distribution from 2020. Am I making this too hard? I am getting hung up on the calculation portion. I prepared it two ways, adjusting each year for the previous “corrective distribution” versus not. The difference to date is only $438, which is not significant in my point of view.

When we do this:

For the 2020 and 2021 corrective distributions, I assume they will receive a 1099R with the NIA to excess contributions being taxable, and this will trigger the excise tax as well as a premature distribution.

For 2022 and 2023, I believe we can correct both of these before Oct 15, 2023 and avoid the excise tax, but and amended 2022 tax return will be needed.



Submitted by Alan - IRA critic on Mon, 2023-04-03 18:31

  • NIA is irrelevant after the extended due date has passed. Therefore, for the 2020 and 2021 excess contribution, a normal distribution of just the actual excess is all that is needed and the custodian need not be told why that distribution is needed. As you said, the 2022 and 2023 excess contributions can be removed prior to their extended due dates in the usual manner, and the custodian typically calculates the NIA for these corrective distributions. The 2022 excess likely has an NIA loss, which avoids taxable gains that would be taxable on the 2022 return.
  • They will each have to file a 2020 5329 to pay the 6% excise tax with a 2020 1040X, same for 2021 when the excise tax includes both the 2020 and 2021 excess contributions. Form 5329 is cumulative, so this all starts with the 2020 5329. There will also be a 2022 5329 and excise tax due for the 2020 and 2021 excess total, but not the 2022 excess, since that will be removed prior to the due date. Finally, a 2023 5329 will be due to show the removal of the remaining excess amounts. No excise tax will be due for 2023. The normal distribution of the 2020 and 2021 excess amounts this year will have to be reported on a 2023 8606, but since this distribution comes from regular contribution basis, it will be non taxable.
  • Secure 2.0 includes relief from the 10% penalty if the NIA is a gain. If there is a gain on either the 2022 or 2023 excess removals, it will be taxable in the year the contribution was made, but there is no 10% penalty.
  • Obviously, the IRS has been doing nothing to detect these excess contributions, which allows them to accumulate and generate 6% excise taxes. However, most tax programs will alert the taxpayer at the time of filing is the Roth contributions are entered into the program. Apparently, this was not done or these client’s could have avoided any excise taxes. 

Submitted by Krista McBeath on Wed, 2023-04-05 11:10

Alan, thank you for this great information.  A point, to clarify, is that the earnings from the 2020 and 2021 are remaining in the Roths because they are paying the 6% excise tax instead of removing the excess contributions before the deadline, correct?Last questions. For calculating the 2022 corrective distribution, I assume we use today’s date to calculate the gain/loss, not CY end 2022 (or whatever applicable year)? Then, when 2023 is calculated, would we take the ending balance (example today’s date) and reduce it by all the corrective distributions taken thus far?I suppose if I was only calculating an processing one at a time- this would resolve itself very easily and probably answers my questions because the value would decrease for each distribution.  But, I am filling out all paperer simultaneously with the appropriate figures.  I think I should reduce the 2022 ending balance by the 2020 and 2021 corrections and the 2023 balance by the 2020-2022 corrections.

Submitted by Krista McBeath on Thu, 2023-04-06 22:15

Alan, thank you for this great information.  A point, to clarify, is that the earnings from the 2020 and 2021 are remaining in the Roths because they are paying the 6% excise tax instead of removing the excess contributions before the deadline, correct?Last questions. For calculating the 2022 corrective distribution, I assume we use today’s date to calculate the gain/loss, not CY end 2022 (or whatever applicable year)? Then, when 2023 is calculated, would we take the ending balance (example today’s date) and reduce it by all the corrective distributions taken thus far?I suppose if I was only calculating an processing one at a time- this would resolve itself very easily and probably answers my questions because the value would decrease for each distribution.  But, I am filling out all paperer simultaneously with the appropriate figures.  I think I should reduce the 2022 ending balance by the 2020 and 2021 corrections and the 2023 balance by the 2020-2022 corrections.

Submitted by Alan - IRA critic on Thu, 2023-04-06 23:52

  • FIrst question, yes that is correct. 
  • Most custodians have software to calculate the gain or loss on excess contributions removed prior to the due date. Is your custodian requiring you to complete the net income calculations?  If so, the formula is in the following link. Note that any distributions during the computation period including the corrective distribution processed first would be added to the adjusted closing balance for the second year’s correction.
  • eCFR :: 26 CFR 1.408-11 — Net income calculation for returned or recharacterized IRA contributions. 

Submitted by frank riffitts on Sun, 2023-07-09 21:19

near retirement and doing a purge of old documents I realized we had excess controbutions to roth iras for myself and wife in 2011 & 2013 (oh boy). I understand utilizing form 5329 for every year since then will take care of the excise tax (6%) and when doing 2023 taxes it will provide closure showing the excess removed again on form 5329. excess contributions will be tax free because its roth accounts, the small earnings stay in account. we are both currently over 59 1/2. we would remove only the excess contributions. form 5329 states its a stand alone form unless you are filing currently (which would be 2023). secure 2.0 act changes the statue of limitations to 6 years for excess contributions. the stature of limitations was considered forever in the past if a 5329 was never filed. generally 3 years are the statue of limitations for taxes. at the end of the day does secure 2.0 act exempt the first six years from 2011/2013? is it only effective from 12-29-22 going forward? it was an oversight not willful neglect, thus making correction, dollar limit, absorbtion no longer options due to the passage of time and later roth contributions that were allowable. an ordinary withdraw is the only option. thank you in advance. i suspect i will have a few more questions in the future.

Submitted by Alan - IRA critic on Sun, 2023-07-09 23:24

Submitted by frank riffitts on Tue, 2023-07-11 02:54

Thank you for your prompt response Alan. Long story short my wife worked part time for years and we were never near the upper limit for contributing to a roth. she goes back to work full time and we contribute again (2011). 2012 we are by chance under the cutoff. 2013 we are over the limit. 2014 I make a reduced contribution based on MAGI, not thinking to check prior years because we were never near the limit. Every year after, we utilzed the formula to determine dollar amounts. She works fulltime a few years and retires and we are back to being far below the cutoff again. Absorption is out. We have never been audited. The only real interaction we ever had was an AUR mistake on my part in 2019 our brokerage account changed numbers midyear (corrected and paid). Same year they considered my childrens 529 tuition room and board monies unreported income. I appealed and submitted tuition and all the documents I had from 2019. Did that I think in 2021, I don’t have the file right in front of me at this moment. Still haven’t got a response and calling does not work you can’t get to a person. I try to follow the rules and stay inside the guard rails.   

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