ROTH IRA Excess Contributions - OOPS! Help pls.

Hi jtrials, I'm happy to help you get this reported correctly. Here's what you need to do:

1-If you made excess contributions in 2021 and 2022, then you will need to make sure those are accounted for on your 2021 and 2022 tax returns. A penalty of 6% is applied to any excess contributions that remain in your IRA after the filing deadline, so Form 5329 should be generated and included with those returns to show the additional penalty tax for each year.

The excess contributions from 2021 would have the penalty assessed in 2021 and 2022 (if they were left in the account). If you subsequently made excess contributions in 2022, as well, then those 2022 contributions would also have the penalty applied in 2022.

The IRS says in Publication 590-A (see pg 43) that you can apply the excess contributions from a prior year to a later year's contribution. This means that you may be able to leave the excess funds in the account and count them as part of your IRA contributions for 2023, as long as you qualify to contribute to your IRA in 2023. In that case, the 6% penalty would no longer be applied to those excess amounts from 2021 and 2022 when you file your 2023 tax return.

2-You mentioned that you contributed $3500 to your Roth IRA in 2023 but would like to remove those contributions before the tax filing deadline. Doing this will allow you to treat those contributions as if they were never made. However, you will still need to report the earnings from those contributions, and you will be subject to tax on those earnings.

To report this on your 2023 tax return, you should select Deductions/Credits > IRA Contributions from the menu and enter your Roth IRA contributions on the 'IRA Contributions' screen. As you continue, you will eventually come to a screen where you are asked if you withdrew any contributions. Answer YES when asked if you withdrew contributions by the tax filing due date. Then enter the amount of your 2023 Roth IRA contributions that were withdrawn. Do not include any earnings in this field. The earnings are not treated as part of your contribution withdrawal and should be accounted for elsewhere.

 3-When you withdraw the contributions by the due date, you need to include the amount of the distribution of the returned contributions you made in 2023 and any related earnings on your 2023 Form 1040, line 4a. Then you include the related earnings on your 2023 Form 1040, line 4b and attach a statement explaining the distribution.

This withdrawal should be reported to you on a Form 1099-R, but you won't receive the 1099-R until next year if the excess contribution and earnings were withdrawn in 2024. So even though it needs to be reported on your 2023 tax return, you
won't be able to do that until you receive the 1099-R from your plan administrator.

For now, you will just need to file your 2023 tax return. Then when you receive the 1099-R in 2025, you can come back and amend your 2023 return to include the 1099-R information.