Over-contribute to Roth multi years

[suesayers]

Client over-contributed to a Roth in 2020.  It was discovered in 2022 and withdrawn 4/14/2022.  I understand that the 6% penalty is  applied for 2020.  I am unclear if it also applies to 2021 since the over- contribution was withdrawn before the due date of the 2022 tax return.  It seems to me that it would because the funds sat in the account for all of calendar year 2021, but I cannot find specific guidance on the due date of withdrawal for the second year of the over-contribution.

[qbteachmt]

Contributed in 2020, but for which tax year?

I like and recommend investopedia articles, as well as investment agency articles (such as Fidelity or Schwab) because they are written in basic English. Examples:

https://www.investopedia.com/what-to-do-if-you-contribute-too-much-to-your-roth-ira-4770686

https://www.investopedia.com/articles/retirement/04/042804.asp

Just google:

excess roth

[suesayers]

The client made a 2020 Roth contribution in 2020.  It was not withdrawn until 4/14/2022.  I know it is subject to the 6% penalty for 2020.   I am trying to determine if the 6% penalty should be applied to 2021 also, even though the 2020 contribution was withdrawn by the due date of the 2021 tax return.  Before I put this out on the forum I researched everything I could think of online, including the Investopedia articles you recommended.  I also checked the U.S. Masters Tax Guide.  If there is specific guidance out there for the second year of the over-contribution I'm not seeing it.  Thanks for responding.

[qbteachmt · Accepted solution]

You are certain that the 2020 deposit is for tax year 2020, and nothing applies to 2021. Because that matters. Everything matters. And you’re stating the 2020 contribution was removed in time for the 2021 tax return to be timely filed. That means the 2020 tax year filing was wrong and needs to be amended, or already has the Form 5329 in it? Because that’s the form to use for each year. What about tax year 2021 having Form 5329? There is the determination for penalty, excise tax, and/or income taxable earnings (depending on the details, age, etc) per year. Maybe 2021 needs to be amended.

There will be a 1099-R for the corrective withdrawal, dated in 2022, code P for prior year. You enter that same info into 2021, even without having an actual 1099-R, because that is the tax year the withdrawal was done for (not when done).

"If there is specific guidance out there for the second year of the over-contribution I'm not seeing it."

The IRS has it. Jump to Part IV for Roth Excess, for each tax year and work your way up:

https://www.irs.gov/pub/irs-prior/i5329--2020.pdf

https://www.irs.gov/pub/irs-prior/i5329--2021.pdf

https://www.irs.gov/pub/irs-pdf/i5329.pdf