excess ROTH IRA Contributions

[swongtax]

Hello,

I have a question about withdrawing Excess contribution to ROTH IRA for tax year 2020 (by submitting a special form to the Brokerage firm).

I know the excess Contribution amount must be withdrawn by 4/15/2020, but for the withdrawal of earnings due to the excess contribution, do I calculate the earnings as of 12/31/2020 or as of the date that I am withdrawing such as today?  The market has gone up so using today's date to calculate the earnings due to excess contribution will result in a higher amount which I will have to pay tax and early withdrawal penalty on in 2021.

Thanks!

Sui

[sjrcpa · Accepted solution]

Earnings on excess contributed amount from date contributed to date withdrawn.

[qbteachmt]

This is incorrect: "will result in a higher amount which I will have to pay tax and early withdrawal penalty on in 2021."

Because you told us this condition: "I have a question about withdrawing Excess contribution to ROTH IRA for tax year 2020"

That is all reported on the 2020 tax return.

[swongtax]

The excess Contribution to ROTH IRA will be withdrawn before the due date of the return, which is 4/15/2021, and yes, the excess withdrawal will be reported on the 2020 Tax Return to zero out the ROTH contribution to avoid the 6% excise tax.

However, the earnings due to the excess Contribution will also need to be withdrawn by 4/15/2021.  If the earnings is withdrawn in 2021, will be earnings be reported on the 2020 tax return as well?  How do I report this because Form 1099-R will not be issued until after 4/15/2021?

Has anyone ever dealt with this before?

Sui

[qbteachmt]

"Has anyone ever dealt with this before?"

You can google it; every investment house seems to provide a flier for how to handle this. But the IRS is your best guidance.

The earnings are considered earned and received in the year the excess contribution was made. You can leave it in and pay the excise tax, take it out, or apply it to the next tax year (absorb it as 2021). If you take it out by the timely filing of the tax return, it's as if it never happened. If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return. Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year.

What you want to read is Pub 590 and 590-a.

The 1099-R that is issued should have a code P in it, for Previous Year.

https://www.irs.gov/pub/irs-pdf/i1099r.pdf

[JRC]

I'm in the same situation. The client also had Federal and State taxes withheld on the Withdrawal of the Excess Contribution and Earnings which didn't happen until March of 2021.  I can't file the return without a 1099R reporting this.

Will the Form be generated now or do we have to wait till next year?  Never had this problem before.

[linduca1216]

If  the excess contribution has lost value, do you still need to do an amended return?

[qbteachmt]

Yes. You would still need to show an excess was made and needs to be reversed, and there should be a corrective distribution. It would be less than the original contribution.

You amend for a number of reasons, and no one here knows what or how many applies to your taxpayer. That can be for reasons of taking a deduction, for changed AGI or MAGI, for updating basis, form 8606, for penalty, interest, excise tax owed.