2021 Excess Contribution to Roth IRA

Submitted by Chanchal Kariwala on Sat, 2023-04-15 20:27

I made an excess contribution to my Roth IRA for 2021 (I wasn’t allowed to contribute at all). The contribution was made in Jan 2022 towards the prior year. I identified this mistake and withdrew the entire contribution from the account in March 2023 (There were no earnings).
I understand that I need to pay a 6% excise fee, but I am confused about the number of years it remained in the account. Should it be one year (since the date of contribution) or two years (since it was for 2021)?
I also missed reporting this contribution in 2021. Should I file only a form 5329 or an amended 1040X with 5329?

I also made an excess contribution to Roth IRA in 2022 (again I’m not allowed to contribute at all). The contribution was made in May 2022. I removed this in March 2023 (no earnings) and fixed it. AFAIK I don’t need to do any reporting for this. I have already filed 2022 returns. Did I need to include a form 5329 to mention previous year’s excess? If so, should I amend 2022? (There isn’t a mistake in owed taxes, just reporting)

Since this was a removal of excess contributions, I don’t think they qualify as “distributions”. I’m not sure what the 1099-R would look like. Since they happened in 2023, do these affect 2023 returns at all? (trying to get ahead this time)



Submitted by Alan - IRA critic on Sat, 2023-04-15 21:45

  • Because the extended due date has passed for a 2021 removal of excess, you owe the 6% excise tax on a 2021 5329. The IRS may or may not accept the form by itself, so if you want to be sure it is not rejected, file it with a 2021 1040X.  The fact that you made the contribution in early 2022 is irrelevant as long as the custodian logged it as a 2021 contribution. The excess from 2021 then carries over to a 2022 5329 on which you would also owe the 6% excise tax because the excess was not removed by the end of 2022. Therefore, you would owe the 6% excise tax for 2 years on the 2021 excess contribution.
  • Be sure you removed the 2022 excess properly, and that does not include just withdrawing the amount of the contribution. The removal would be by a corrective distribution for which the custodian must calculate gain or loss. Check your Roth statement to be sure that a corrective distribution is shown. If there was a loss you would receive less back than the initial 2022 contribution. Ideally, this excess 2022 contribution and it’s removal should have been stated in an explanatory statement with your 2022 return, but if you did not do that, don’t worry about it now.
  • In March, you withdrew the amount of the 2021 excess as a non corrective distribution. You will get a 1099R for this and you need to report it on a 2023 8606. Since it was a distribution from your regular contributions balance, it would be non taxable. You also withdrew the 2022 excess adjusted for gain or loss, and you will get a separate 1099R coded PJ for that. Do NOT report this corrective withdrawal on Form 8606 or anywhere else on your 2023 return as this applies to 2022. 
  • FInally, you will need a 2023 5329 to show that the excess from 2021 that carried over to 2022 has been removed leaving a 0 excess balance on Form 5329. There will be no excise tax for 2023. 

Submitted by Chanchal Kariwala on Mon, 2023-04-17 18:33

Thanks for the detailed explanations. All of this makes sense.

  • I understand filing 5329 for both 2021 (since it was for 2021) and 2023 (since it was removed in 2023). Since the excess carried over to 2022, does 2022 need a form 5329 too (line 18)? Does this mean another amendment?
  • 5329 for 2021 calculates line 25 as excise fee for one year. Which year-form combination would have it for 2022? (Since in 2023 line 25 would come to zero since everything has been fixed.)

   

Submitted by Alan - IRA critic on Mon, 2023-04-17 19:14

Yes, the 5329 needs to be filed for every year as long as there is an excess remaining, and also in the year the excess is completely corrected to show that 0 excess remains. My first bullet point earlier does indicate that a 2022 Form 5329 with a 1040X needs to be filed to report the 2022 excise tax on the 2021 excess that was still not removed by the end of 2022. Lines 18, 22, 24 and 25 need to be completed, but not line 23 because the 2022 excess is being removed by a corrective distribution by the due date.

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