Rectifying Several years of excess Roth contributions

[CopiousZoid]

Not realizing I was ineligible to contribute to my Roth IRA, I made excess contribution for years. In 2015, 2016, 2017, and 2018 I contributed the limit at the time of $5,500 per year when I was eligible to contribute $0. I realized this in April of 2019 before filing my 2018 tax return. I talked with my Roth IRA custodian and because I was still within the timeframe to remove my contribution for 2018 I withdrew that contribution ($5,500) as well as the gains on that contribution ($556). I also withdrew the excess contributions from the prior three years ($5,500 x 3 = $16,500) at that time (April 2019). My custodian sent me a 1099-R for the 2019 tax year in early 2020, which I unfortunately did not include in my 2019 return. I normally just use my 1099-INT and DIV from that company, so I totally missed the 1099-R. My mistake and I’m going to pay for it now. I just received a letter from the IRS about it recently and am trying to rectify my mistakes. Here is what the 1099-R says:

Gross Distribution (Box 1)	Taxable Amount (Box 2)	Taxable Amount Not Determined (Box 2b)	Federal Tax Withheld (Box 4)	Distribution Code (Box 7)
16,500		X	0	J
6,056	556		0	PJ

Notes: The $16,500 is the three years of excess contributions I didn’t catch in time (2015, 2016, & 2017). The $6,056 is the $5,500 excess contribution for 2018 that I caught in time before filing for 2018 taxes and the $556 in gains on that contribution.

My questions:

• Why is the first line (the $16,500 of excess from prior years) coded at “J”? That appears to consider it an early distribution rather than an excess contribution withdrawal. Should this coded either “P” or “8” which would be a code for an excess contribution? When I enter this into TurboTax as an amended return for 2019 it treats the entire $16,500 as taxable income? Those were after tax contributions that were made in error, why would I owe income tax on them a second time?
• Do I need to submit an amended return for 2019 (I assume so), and what about the other years that I had excess contributions? Do I need to amend them as well?
• Here are my expectations on what I rightfully owe. Please let me know if I am wrong here:
  • I owe a 6% “penalty” on any excess contributions in my account PER year (for example, my 2015 contribution of $5,500 I owe 6% of that each year for 2015, 2016, & 2017). I calculate that for all excess contributions that I didn’t catch in time (years 2015, 16, & 17) as being $2,970. I don’t see where or how that gets entered or calculated in TurboTax.
  • I *might* owe 10% penalty on the gains from my 2018 contribution ($556). As well as probably capital gains tax on that $556. Not sure where or how that gets calculated in TurboTax.
  • I might owe some assorted late fees, interest on amounts owed, etc. for not getting this right the first time and waiting this long to resolve this issue.
• Here is what I do NOT expect to owe:
  1. Income taxes on any removal of excess contributions. This is a Roth and there are post tax dollars to begin with and the removal is to correct a problem, not a normal distribution.
  2. Any penalties or fees for removing money from the Roth while I’m younger than 59 ½. Again, this is not a normal distribution, just rectifying a mistake of excess contributions.  

TurboTax doesn’t seem to allow me to enter any of this context and it just immediately thinks I owe everything as income tax and doesn’t seem to consider the 6% per year issue at all. Help! Sorry for the long post.

[macuser_22]

The code P 1099-R is for the excess that was removed in time and does not have a penalty.

The code J is a normal distribution which is the only way to remove an excess that was not timely removed.

Since the 2015, 2016 & 2017 contribution were not removed within the time limit you will owe a 6% penalty for the year of the contribution and each following year until that excess is removed.

If removed in 2019 you owe the 2015 penalty for the 2015 tax year, again for 2016, 2017 and 2018, the 2016 penalty for 2016, 2017 and 2018, and the 2017 penalty  for 2017, and 2018.

You do this by filing a 5329 form with the penalty for each missed year,  the oldest first, 2015,   The 2016 5329 would have both the 2055 excess and 2016 excess and the penalty for the total of both.

Likewise for 2017 and 2018.

You can get prior year 5329 forms here:

https://apps.irs.gov/app/picklist/list/priorFormPublication.html;jsessionid=TOt2soSKDxGFWF90jyq9I1GA...

You said you received an IRS letter - what does it tell you to do?

(A tax professional such as a EA, might be able to make a deal with the IRS to lower the penalties  and could file the 5329 forms easier.)

[CopiousZoid]

Thanks for the reply! Completely agree with your math for calculating the 6% per year penalty. For the 5329 form, are you saying I need to amend my tax filings for each year (2014, 2015, etc.) or can I somehow do a single amendment for 2019 that calculates the 6% penalty accrued over the years?

The IRS letter said that my custodian submitted a form that I didn't include in my return, which is true since I forgot to include the 1099R for my 2019 tax year. Just looking at the 1099R without the context, the IRS is treating the $16,500 removal of prior years excess contributions as "retirement income" and taxing the full amount as income (it says I owe %5,594 in additional taxes before interest, underpayment penalties, etc.). Nothing in the form specifies that this is removal of prior year contributions.

[macuser_22]

There is no need to amend since nothing else on the tax return  would change.    You can submit the 5329 forms by themselves.     You are amending anything since you never filed the 5329 forms in the first place, you are just filing the 5329 that should have been in the original tax returns late.

A separate 5329 form for each missed year must be filed and it must be on the form for that year - they cannot be combined.

Also you could not amend 2015-2017 with TurboTax anyway since that software is no longer available unless you already have it installed on your computer.

[macuser_22]

---

The IRS letter said that my custodian submitted a form that I didn't include in my return, which is true since I forgot to include the 1099R for my 2019 tax year. Just looking at the 1099R without the context, the IRS is treating the $16,500 removal of prior years excess contributions as "retirement income" and taxing the full amount as income (it says I owe %5,594 in additional taxes before interest, underpayment penalties, etc.). Nothing in the form specifies that this is removal of prior year contributions.

---

Your own contributions that are distributed are not taxable.

Call the IRS number on the letter and tell them it was a removal of your own contributions.   If they want an amended return then:

For that you should amend 2019 and send the amended return to the address on the letter.

Enter it this way:

You can always withdraw your own Roth contributions tax and penalty free.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

One of the followup questions will ask for your prior year** contributions not previously withdrawn. Those contributions that still remain in the Roth will not be taxed or subject to a early withdrawal penalty. That will add a 8606 form to your tax return with the Roth contribution and tax calculation in part III.

Note: **Prior year - any current year Roth contributions should be entered into the IRA contributions section. They will not show up in the prior years contributions but will be accounted for on the 8606 form that calculates the taxable amount.

[Mike9241]

I would recommend using a tax pro. you potentially owe thousands of $'s in penalties + income taxes on the income withdrawn. they should be able to negotiate a setttlement with the IRS.  

[fanfare]

"There is no need to amend since nothing else on the tax return  would change.    You can submit the 5329 forms by themselves.     You are amending anything since you never filed the 5329 forms in the first place, you are just filing the 5329 that should have been in the original tax returns late."

This is an absurd statement.

Of course something is different the tax owed is increased, due to the addition of Form 5329.

Use Form 1040-X to change or add information on an already filed tax return.

Since the penalties accrue through the years, I think one amended  return with all the penalties would be accepted.

You will have to attach a detailed explanation since what you are doing won't fit in the Part III box provided.

You are able to request waiver of some or even all of the penalties.

See Form 5329 to request a waiver of the penalty.

You will have to pay the tax on the earnings and probably interest.

Meanwhile respond to the IRS notice that you intend to amend.

[arhoton]

For Roth, earnings are always taxed when you withdraw them but contributions aren't. In this case he stated he did not withdraw earnings for 2015-2017 only excess contributions. So while he will have accrued penalties as previously described. I don't see something that would trigger more taxable income for those years as that is money that has already been taxed. Exception would be for his 2018 contribution when he caught the entire issue and he withdrew it AND the contributions prior to filing time.  Would a 2018 amendment be all that is needed to address the taxable earnings and penalty? That is assuming you can indeed file a 5329 by itself couldn't he do that for 2015, 2016, 2017.  What am I missing?

[macuser_22]

---

@arhoton wrote:

For Roth, earnings are always taxed when you withdraw them but contributions aren't. In this case he stated he did not withdraw earnings for 2015-2017 only excess contributions. So while he will have accrued penalties as previously described. I don't see something that would trigger more taxable income for those years as that is money that has already been taxed. Exception would be for his 2018 contribution when he caught the entire issue and he withdrew it AND the contributions prior to filing time.  Would a 2018 amendment be all that is needed to address the taxable earnings and penalty? That is assuming you can indeed file a 5329 by itself couldn't he do that for 2015, 2016, 2017.  What am I missing?

---

After the due date has passes, only the excess contribution need be removed, the earnings stay in the IRA.   Earnings are only removed if with the excess as a return of contribution withing the time limit to remove it.    Paying the 6% penalty on the excess allows the earnings to stay in the IRA - see IRS Pub 5909B.

Since nothing else on the original tax return is changing, the stand-alone 5329 will properly report the penalty.   That must be file for each year.   You can amend if you want - it will not hurt but the software is not longer available.

As suggested above,  I would see a tax professional who could possible get a compromise with the IRS.

[fanfare]

I forgot about the loophole that lets you keep your earnings on not-allowed contributions in your Roth IRA if you wait the designated time ( I believe Oct 15th of the next year ) and satisfy the other requirements.

@CopiousZoid I guess you did not know of this loophole. Few people are aware of it.

Yes there is no tax or penalty to take out your own contributions because it is a Roth.

You can't get a waiver on the yearly  6% excess contribution tax.