EXCESS 2022 VOLUNTARY ROTH CONTRIBUTIONS

[dgentil3]

In August 2022, I made a $7,000 ROTH Contribution to a credit union because I believed our MAGI would be low enough to allow this Voluntary ROTH Contribution.

In October 2022, my wife also made a Voluntary $7,000 ROTH Contribution to a credit union also believing that our MAGI would be below the threshold.

When we completed our 2022 taxes in early 2023, we learned that our MAGI was over the limit.

We contacted the respective credit unions and had both $7,000 ROTH Contributions removed and all interest payments removed prior to the required IRS filing date of April 18, 2023.

Thus far, all we have received from these credit unions are IRS 5498 Forms showing that we each had contributed $7,000 to our respective ROTH IRAs plus an indication of the total amounts on deposit in these ROTH IRAs.

From research, it appears we should file an amended IRS 1040x and pay taxes on the interest removed from our ROTH IRAs (interest which should not have been earned in our IRAs). However, we have now learned that our credit unions will be sending each of us IRS 1099-R Forms which will show each respective $7,000 overpayment, plus the interest earned in the ROTH IRAs which had already been removed prior to the April 18, 2023, filing deadline. FYI, we are both over 70.

If we file an amended IRS 1040x now for 2022 tax year and pay the interest actually received from the excess contributed ROTH IRAs, will the IRS 1099-R Forms we receive in early 2024 cause us to have to pay tax again on this interest?

On another question, if we file an amended IRS 1040x now and explain everything, it appears we may be able to avoid the 6% penalty [Within six months of the original filing date (OCT 2022)]. 

As we understand, "Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made."

IF you remove the contribution Before your taxes are due but after filing your return: You can avoid the 6% excise tax. You will need to file an amended return within six months of the original return due date (generally by October 15). Write “Filed pursuant to section 301.9100-2” at the top of Form 1040X. If the excess generated any earnings, you’ll need to remove them and include them on your gross income.

What about IRS FORM 5329 (2022), do we need to file this with the Amended IRS 1040X? This form makes it sound like the 6% penalty must be paid on the $7,000 plus interest earned on it in 2022, reagardless of notifying IRS before or after filing taxes on April 18, 2023.

This is all very confusing, even to tax preparers we have questioned. If anyone has any filled out examples of what needs to be filed now this would be greatly appreciated. We need to know what to do next year when we both receive these IRS 1099Rs from our credit unions.

Thank you for your help.

[abctax55]

As pointed out in your other post two years ago, you should post your DIYer questions over in the TurboTax Forum. 

https://proconnect.intuit.com/community/tax-talk/discussion/depreciation-recapture-and-relationship-...

[sjrcpa]

Also, how much interest could $7,000 earn in a credit union in 5 or 6 months?

Might this be much ado about almost nothing?

[abctax55]

Yeah... CU's are paying 1% max in my neck o' the woods.  So maybe $ 25 or so??

[qbteachmt]

"all we have received from these credit unions are IRS 5498 Forms"

The 5498 is a 2022 activity; 2022 is done. 2023 activity isn't reported until 2023 is done. Taking it out in 2023 doesn't accelerate their reporting of that annual activity.

"that our credit unions will be sending each of us IRS 1099-R Forms which will show each respective $7,000 overpayment, plus the interest earned in the ROTH IRAs which had already been removed prior to the April 18, 2023, filing deadline. FYI, we are both over 70."

That's right. The 1099 will be/should be coded for prior tax year for the distribution, if it was properly identified as a corrective distribution requested, for 2022.

"If we file an amended IRS 1040x now for 2022 tax year and pay the interest"

Report as taxable...

"actually received from the excess contributed ROTH IRAs, will the IRS 1099-R Forms we receive in early 2024 cause us to have to pay tax again on this interest?"

No. That's why it is coded as prior year.

"This is all very confusing, even to tax preparers we have questioned."

Then you need to ask better professionals. Everything you are asking is common, frequent, not unusual. Corrective Distribution is not a big deal, since you did it prior to the tax filing due date.

"This form makes it sound like the 6% penalty must be paid on the $7,000"

It's moot. Right here: "is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn."

You should lose this Web Page bookmark. You are not using the software in use here, to prepare your clients' return. You seem to be lost on the internet. This is not a place to get personal tax help. No one will give you example forms, filled in, diagrams, explanations. Well, you can get that at the IRS, and I like investopedia articles, and even the brokerage houses offer that type of info, come to think of it. You should look to resources and not ask strangers on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer using TurboTax. Please visit the TurboTax Help site for support.

And try this screen, for the various topics (subforums): https://ttlc.intuit.com/community/discussions/discussion/03/302

Your sign in user info here is the same one you can use over at the TurboTax forum.

Thanks.

[qbteachmt]

Here's a great article that was posted earlier today:

https://proconnect.intuit.com/community/intuit-tax-advisor/discussion/when-should-i-use-the-communit...

[dgentil3]

Most credit unions are paying 5 to 6 percent on short term CD rates. The 6% penalty on the contribution is the real issue though.

[abctax55]

Please provide the name of that Credit Union - I have some cash to invest.

If withdrawn timely, as has been referenced, the 6% penalty doesn't apply.  

[dgentil3]

GE Credit Union has recently advertised some good rates - there are others, even some banks. IMO, I believe the rates overall will tend higher in the near term. GLTA

[qbteachmt]

"The 6% penalty on the contribution is the real issue though."

No, it's not. You told us you took it out before the tax filing due date (and there is another 6 month margin, for good measure). You don't need to be concerned about everything that doesn't apply.

I mentioned investopedia articles. You asked for help. Are you using the resources offered?

"You won't face any penalties if you simply withdraw your excess contribution—plus any income it has earned in the meantime—by the due date for your tax return, including extensions. You will, however, have to include the earnings portion in your taxable income for the year.

Internal Revenue Service. "Internal Revenue Service. Publication 590-A: Contributions to Individual Retirement Arrangements (IR...," Page 42.

The technical term for these earnings is net income attributable (NIA)."

Use these articles:

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

I got my mother to put the proceeds of her house into Treasury Direct. They're pushing 5.5%, and you can reinvest automatically (turn over the same investment up to two years). Even the 4 week is over 5%. She loves it. At 87 and now a widow, I think she just likes being in full control and likes the visibility.