Multiple year excess Roth

Submitted by N B on Sat, 2024-01-20 16:19

Hello,

This is a wonderful source of information, thank you for answering the questions and helping.

I recently realized that I have been contributing to my Roth even after I became ineligible in 2018 (phased out in 2018 and $0 allowed from the next year,joint income). Filled out the forms at the custodian and the amounts(excess contributions) were distributed: contributions only for the prior years and contribution&earnings for 2023 (maxed out the contributions every year), this was done in late December 2023. I was issued one 1099R for 2023 with codes 8,J(2023 contributions + earnings) and a second 1099R for 2023 for the prior years amount, code J, box 2b checked , all the distributed contributions totaled as the amount. The earnings for all the years except 2023 still remain in the Roth.

Looking at the current value(performance,mainly stock based investments) it seems it would be better to pay the penalty and leave the earnings with the previous balance in the Roth to grow in value(there’s some more time to qualify).

Am I right in the understanding that filing the Form 5329 alone for each of the prior years (no 1040x needed) along with the penalty is sufficient? Also, not quite clear how the second 2023 1099R should be handled.

I have also understood that the amount can be rolled over to a new traditional IRA for a Roth backdoor, pulled the amount without thinking too much, is this a possibility and how far back could it go ? The penalty will apply anyway? Also fairly certain I won’t be able to mark them for carry forward.

It would of real help if you could provide your analysis & view on the situation.



Submitted by Alan - IRA critic on Sat, 2024-01-20 16:48

  • The 1099R forms you received appear to be correct including the coding. You will owe the 6% excise tax on Form 5329 for the years that ended with excess contributions still in the Roth, except for the 2023 excess, which you had removed with any earnings. When you owe the 6% excise tax for a year (years prior to 2023), any earnings remain in the Roth, which can be sort of a trade off for owing the 6%.
  • The amounts withdrawn as excess contributions are not eligible for rollover to any other IRA.
  • Form 5329 instructions indicate that a prior year 5329 should be filed with a 1040X. Sometimes the IRS will accept the form alone and sometimes they kick it back and request the 1040X with the 5329. You need to complete these forms starting with 2018 first as the excess amounts are cumulative, file these forms and pay the excise tax for 2018-2022 on the accumulated excess at the end of each year, so the 2022 excise tax could be based on around 25k. Finally, you will need a 5329 for 2023 showing that there is no longer an excess amount in your Roth since you removed the earlier ones by distributions and the 2023 amount amount with any gains. There will be no excise tax for 2023. Your 2023 tax return should include an explanatory statement regarding the removal of the 2023 excess, but not for the prior years. The 8J coded 1099R is not reported on Form 8606, just on line 4a with the gain on 4b of Form 1040 and on the explanatory statement referred to above.
  • Finally, you must report the J coded 1099R on Form 8606 as a non qualified distribution taken from your balance of Regular Roth contributions. This distribution will be non taxable because it comes from your regular contribution balance shown on line 22 of Form 8606.
  • Therefore, other than the small gain there is no income tax due. However, the 6% excise taxes for multiple years will add up. 
  • Too bad the IRS did not flag your excess contributions earlier, as that would have prevented these from accumulating.

Submitted by N B on Sat, 2024-01-20 18:13

Thank you sir , really appreciate your time ,very clear .I have read lots of your threads , you are an amazing individual helping out so many people. =====Would there be any need for related filings to the state or is this going to be all federal , as no new income is being reported ? 

Submitted by Alan - IRA critic on Sat, 2024-01-20 19:15

It’s federal only, but the taxable amount in Box 2a of the 8J coded 1099R will be taxable for both state and federal. Your state return can be filed as usual. Note that the gain in Box 2a is not longer subject to the 10% early withdrawal penalty. 

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