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Withdrawn the excess IRA contribution, but not the earnings - Need advice

ukua13mr20

After making the Roth IRA contribution of $7000 in 2024, I realized that I was not eligible to contribute & I withdrew the full amount of my 2024 contributions i.e., $7000. However, I did not remove the "earnings" before filing my returns for 2024. Custodian generated 1099-R with distribution of $7000 & Box 2a says "taxable amount not determined". I believe I need to file an amendment to 2024 return with 1099-R form. Today I have cleared my Roth IRA account & sold everything. Could you pls advice & guide me on the steps that I need to follow to close any gaps?

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JanaA

Hello ukua13mr20! Since you withdrew the $7,000 contribution but not the earnings before filing your 2024 return, the correction was not fully complete. Generally, to avoid the 6% excise tax, both the excess contribution and any earnings on it must be withdrawn by the tax filing deadline (including extensions). Because the earnings remained in the account, you will likely need to address the following across multiple tax years.

For your 2024 amended return, you will generally need to file a Form 1040-X to include the 1099-R you received (for the $7,000 withdrawal) and attach Form 5329 to report the excess contribution and calculate any 6% excise tax owed on the earnings that remained in the account.

For tax year 2025, if the earnings remained in the account through the end of 2025, a Form 5329 on your 2025 return may also be required to report the 6% excise tax for that year.

For tax year 2026, the earnings you withdrew today will be reported on a new 1099-R that your custodian will issue in early 2027. That amount will generally need to be included as income on your 2026 tax return, and depending on your age, an early withdrawal penalty may also apply.

To amend your 2024 return in FreeTaxUSA, log in to your account, go to the Account menu, and select "Amend Tax Return." From there you can add the 1099-R and the software will guide you through Form 5329. Information about the excess can be entered by selecting the Deductions/Credits tab and then IRA Contributions from the drop-down menu.

ukua13mr20

Hello JanaA, Thank you so much for your quick response. This is really helpful.

Could you pls confirm the below steps?

1 As of Dec 31 2024, my contribution of $7000 has earned $100 (example). In this case, while amending my 2024 return, I'll have to show this $100 as excess contribution and calculate 6% excise tax along with reporting the distribution of $7000 thru 1099-R. Correct?

2 As of April 9 2026, the same $100 has earned additional $50. And this $150 has been withdrawn before the filing deadline for 2025. So in current year's return, I'll have to again show $150 as excess contribution and calculate 6% excise tax. Correct?

3 Can I include the excess amount that I withdrawn ($150) before the filing deadline for 2025 within my 2025 returns as 'Income'. I hope this would prevent me from filing an additional amendment next year. Pls confirm.

Many thanks again!!

ukua13mr20

Also the amendment for 2024 pulls the 5329 form for 2023. Is there a way to get the 2024 form generated? Pls suggest

JanaA

Hello ukua13mr20! Thank you for laying out your questions so clearly. Let me go through each one.

For question 1, your understanding is generally correct. Since you withdrew the $7,000 principal but not the earnings before filing, the $100 in earnings that remained in the account as of December 31, 2024 is treated as the excess contribution for 2024. On your amended 2024 return, you would generally report the $7,000 distribution via the 1099-R and use Form 5329 to calculate the 6% excise tax on the $100 excess that remained in the account at year-end.

For question 2, this is also generally on the right track, but with one clarification. The $100 excess from 2024 carries into 2025, so a 6% excise tax on that amount would still apply for 2025 since the excess existed in the account throughout the year. However, because you withdrew the $150 (the grown earnings) before the 2025 filing deadline, the excess is treated as eliminated going forward, so you would not carry any excess into 2026.

For question 3, yes, you can and should include the $150 earnings as income on your 2025 return. Since the withdrawal happened before the 2025 filing deadline, the earnings are reportable in the year of the withdrawal (2025). Your custodian should issue a 1099-R for this amount, and reporting it on your 2025 return is the correct approach. This does prevent any need to amend 2025 later.

Regarding the Form 5329 showing 2023 instead of 2024 in your amendment, this is a known behavior in the software when prior year excess information needs to be entered. To get the correct 2024 Form 5329 to generate, go to Deductions/Credits, select IRA Contributions, and answer "Yes" when asked if you had any excess IRA contributions. Continue through the screens until you reach the Prior Year Excess IRA Information screen, where you can enter the relevant amounts. Once that information is entered, the software should generate the 2024 Form 5329 for your amended return. You can verify it is there by going to the Federal Tax Summary screen and viewing your "as amended" supporting forms.