Prior Years Excess Roth
Individuals – MFJ- appears to have made too much money in 2022- AGI- $232,570 and 2023- AGI $ 246, 489
What is best way to remove and rectify?
A part two Form 5329?
pay penalty Amount x 6% times #years?
withdrawal all pay penalty on excess?
Thanks
Steve
Permalink Submitted by Alan - IRA critic on Tue, 2024-06-18 14:38
The limits are based on MAGI which excludes conversions, so if there were any conversions in those figures the MAGI could drop below the max limit.
A 5329 with a 1040X for 2022 must be filed to pay the 6% excise tax on the excess amount for 2022.
But if taxpayer filed a 2023 return by the due date or filed an extension, there is still time to remove the 2023 excess with adjustment for gain or loss. This deadline is 10/15/2024.
The 2022 excess can be corrected by either absorption or distribution. If 2024 MAGI will be low enough to absorb some of the prior excess, the absorbed portion need not be distributed. Otherwise, the total 2022 excess should be withdrawn (the earnings stay in), This can wait until later this year to allow the excess to generate more tax free gains. A 2024 5329 must be completed to reflect the absorption (if any) and distribution which eliminates the 2022 excess. There will be no penalty on the 2024 5329.
A Form 8606 will also be needed to report the 1099R and the income tax effect of the distribution, but since any distribution would come from regular Roth contributions, there will not be any income tax due. Note that if there has already been a distribution in 2022 or 2023 since these contributions were made, that distribution would have reduced the excise tax due, and should be reflected on the 5329 for the distribution year and the form asks for that info.
The IRS may or may not bill late interest on payment of the excise taxes.
If the 2022 excess is removed without gain or loss and the 2023 excess can be removed with gain or loss prior to 10/15 there will be a separate 1099R for each. Removal of the 2023 excess with gain or loss is not reported on Form 8606, but removal of the 2022 excess is.
Permalink Submitted by steve jackson on Tue, 2024-06-18 18:00
For 2023 and 2024 does this mean he can still leave the contributions and earnings intact in the Roth after paying the 6% taxes or does the earnings and contributions need to be removed /taken out?
Permalink Submitted by Alan - IRA critic on Tue, 2024-06-18 19:09
First, I edited my prior post to reflect that there is still time to remove the 2023 excess prior to the due date. If the taxpayer either filed their 2023 return by the due date or filed a timely extension, there is still time to remove the excess prior to 10/15/2023. This corrective distribution must include allocated gain or loss. Gains would be taxable in the year the contribution was made, but the excise tax would be avoided.
But the 2022 excess must be removed. Since removal of the 2022 excess will be after the extended due date, only the exact amount of the 2022 excess should be removed. Any gains can stay in the Roth.
Another way of putting it is that when the excise tax is due, there is no earnings adjustment. But if the 2023 contribution can still be removed prior to the 2023 extended due date, there must be an earnings adjustment.
More complexity – if the 2023 contribution has gained enough such that the tax on the gains would exceed the 6% excise tax, the taxpayer could choose to remove just the excess after 10/15/2024, report the excess on a 2023 5329 and pay the 6%, but the gains would stay in the Roth. This usually requires a gain of 25% or more to be worthwhile and stocks may have produced that much of a gain since the 2023 contribution.
Permalink Submitted by steve jackson on Thu, 2024-06-20 15:33
So even though there income was above thre income limits for both 2022 and 2023 they can still do the contributions? I was thinking they would have to remove all contributions and earnings( except the exceptions you mentioned). Did you mean 10/15/2024 in your above statement not 10/15/2023?
Thanks
Steve
Permalink Submitted by Alan - IRA critic on Thu, 2024-06-20 16:34
No, the contributions must be removed but the 2022 contribution must be removed by distribution of the exact excess amount because the due date for 2022 contributions has passed. On the other hand, the 2023 contribution extended due date is not until 10/15/2024 so it can still be removed before then as a specific return of the 2023 contribution adjusted for gain or loss. That avoids any excise tax on the 2023 excess, but any gain accompanying the distribution of the 2023 excess will be taxable in the year the contribution was made.
The 2022 5329 excise tax is 6% of the 2022 excess amount. If the 2023 excess is removed before the extended due date there will be no excise tax on it, but a 2023 5329 will still be required to report another year of 6% penalty on the 2022 excess.
Removal of the 2022 excess is an ordinary distribution, requested as a distribution of $x. This will be reported on a 1099R and Form 8606. But removal of the 2023 excess by 10/15/2024 must be specifically requested as a return of the 2023 excess, and the custodian will calculate gain or loss and distribute the adjusted total. This will be coded as an excess removal on a separate 1099R and that distribution is not reported on Form 8606.
Again, to enable use of the extended due date for the 2023 excess the taxpayer must either have filed the 2023 return or an extension by 4/15/2024.