Need Advice on my excess Roth IRA contribution

Hi Ted! I can help you get this reported correctly. There's a lot going on here, so let me break it down by year.

REGARDING 2023:

Your excess contributions for 2023 will be treated as not having been contributed if you make the withdrawal by the due date of your 2023 tax return AND you withdraw any earnings on the withdrawn contributions and include the earnings in gross income. Based on what you've told me, it sounds like you are on the right course. You have entered the Roth IRA contributions on the "IRA Contributions" screen and indicated that you withdrew the excess amount ($6,500), making it so that no penalty was assessed for the excess contribution.

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 would include the related earnings on your 2023 Form 1040, line 4b as the taxable amount of 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to you on a Form 1099-R, but you won't receive the 1099-R until next year if the excess contribution and earnings were withdrawn in 2024.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 IRA administrator.

For now, you will just need to file your 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.

REGARDING 2022:

We would need to review your 2022 tax return to determine why there was no penalty assessed for your excess contributions last year. It may be best for you to sign in to your account and contact Customer Support from there so that they can view your information and discuss it with you. In the meantime, I can provide some general information here.

If you look at line 25 of Form 5329, you will see that the penalty is calculated on either your excess contributions OR the value of your Roth IRAs on Dec 31. If it was indicated in the software that your Roth IRA value was $0 on Dec 31, 2022 instead of at least $6,000 (because of the contribution that was made and not withdrawn), then that could explain the reason for your penalty being $0 on Form 5329 last year.

You may want to sign in to your 2022 account and review your entries on the IRA Contributions screens to make sure everything was entered correctly. You can do that by going to the following link: https://www.freetaxusa.com/2022

If an inadvertent mistake was made, you can file an amended 2022 return to correct the calculations on Form 5329. Just click on the 'Amend Tax Return' link on the right-hand sidebar in your 2022 account, and the software will walk you through the amendment process from there.

Since your excess 2022 contributions were left in the account and not withdrawn in time, then they are treated as a Roth IRA contribution for 2023. However, if you were not eligible to contribute to a Roth IRA in 2023, then that $6,000 will still be considered an excess contribution in 2023. To avoid the tax on that excess contribution continuing to accrue from year to year, you must withdraw it along with any associated earnings, which it sounds like you have now done.

As I mentioned above, next year when you receive the 1099-R reporting the withdrawal, you can amend your 2023 return to include that distribution.

In the meantime, it sounds like the 6% tax is being applied on your 2023 tax return to the 2022 excess contributions that were carried over to 2023. You may be able to remove that tax by revisiting the IRA Contributions screens (under the Deductions/Credits menu).

You are asked there if you have 2022 excess Roth IRA contributions. Then when you come to the 'Prior Year Excess IRA Information' screen, you will be prompted to enter the excess contributions from your 2022 Form 5329, line 24. You will be asked if you withdrew the entire amount of all of your Roth IRAs. If you are able to answer YES there, then no penalty will apply.

1. A: Information will appear on line 4a and 4b of Form 1040 based on your 1099-R entries. That is done in the software by selecting Income > Common Income > Retirement Income (1099-R) from the menu.

However, since you haven't received your 1099-R, you won't be able to enter that information yet. It sounds like you have an idea of the amounts to report, but we strongly recommend that you wait until next year when you receive the actual Form 1099-R reporting the distribution—that way you can make sure that the correct information is being reported (especially when it comes to the earnings). Once you have the 1099-R, you can come back and amend your 2023 return to add the 1099-R info. For now, you will need to file without that information on line 4. The IRS understands that IRA transactions that take place in 2024 won't be reported to taxpayers on tax forms until next year, so this is a normal occurrence.

2. A: If the 6% penalty was mistakenly left off of your 2022 Form 5329 because your Roth IRA value was not reported correctly, then you can amend your 2022 return to fix that. Please follow the instructions I previously provided to do that.

Once you have started the amendment and are ready to edit your 2022 return, select Deductions/Credits > IRA Contributions from the menu to revisit the question that asks about your Roth IRA value. Be sure to click on 'Save and Continue' at the bottom of any screen on which changes are made.

If you also need to add a dependent, you can do that by selecting Personal > Dependents from the menu.

When you are done, selecting Filing from the menu and go through those screens to finalize the amendment. It won't matter too much if you submit the 2022 amendment first or your 2023 tax return first as the IRS processes them separately.