How To Fix Excess Roth Removal With Amended Return

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UpsetRaptor
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How To Fix Excess Roth Removal With Amended Return

Post by UpsetRaptor » Fri Feb 08, 2019 12:47 pm

Scenario:
- Jan 2017 I contributed $5500 to Roth IRA for each myself + spouse.
- Unexpected income in late 2017
- Tax time 2018, find our 2017 AGI was ~$187K, so a little bit into the Roth IRA phase-out window for MFJ.
- Mar 2018 I work with Vanguard. They calculate the excess plus earnings, and that total, minus a little bit of taxes withheld, is withdrawn. Total's around $1K for each of us. No recharacterization or conversion (existing tIRAs), just straight removed the excess plus earnings. Vanguard says nothing else to do for now, you'll get a 1099-R in early 2019.
- Feb 2019 I have 1099-R now, importing into 2018 taxes.
- Tax software says "This distribution was taxable in 2017, not 2018" and you'll need to amend your 2017 return.

Is that last point true? I was thinking/hoping I could just file it with this year's return. If so, how do I go about amending the 2017 return at this point - what form to use, etc?

Alan S.
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Location: Prescott, AZ

Re: How To Fix Excess Roth Removal With Amended Return

Post by Alan S. » Fri Feb 08, 2019 3:35 pm

UpsetRaptor wrote:
Fri Feb 08, 2019 12:47 pm
Scenario:
- Jan 2017 I contributed $5500 to Roth IRA for each myself + spouse.
- Unexpected income in late 2017
- Tax time 2018, find our 2017 AGI was ~$187K, so a little bit into the Roth IRA phase-out window for MFJ.
- Mar 2018 I work with Vanguard. They calculate the excess plus earnings, and that total, minus a little bit of taxes withheld, is withdrawn. Total's around $1K for each of us. No recharacterization or conversion (existing tIRAs), just straight removed the excess plus earnings. Vanguard says nothing else to do for now, you'll get a 1099-R in early 2019.
- Feb 2019 I have 1099-R now, importing into 2018 taxes.
- Tax software says "This distribution was taxable in 2017, not 2018" and you'll need to amend your 2017 return.

Is that last point true? I was thinking/hoping I could just file it with this year's return. If so, how do I go about amending the 2017 return at this point - what form to use, etc?
Yes, the earnings returned with your excess removal is taxable for the year IN WHICH you made the contribution, which was 2017. As such the 1099R you received would be coded P in Box 7, and probably code J as well if you are under 59.5. Therefore, the Box 2a amount is taxable in 2017 and unless you qualify for a penalty waiver you owe a 10% penalty on the amount in Box 2a.

To report this, you would need to file a 1040X (amended return) for 2017, adding the taxable income and paying the penalty, if applicable. On the other hand, since this applies to 2017, you would NOT report any of this with your 2018 return.

You might also find that the Box 2a amount if large enough, when added to your 2017 AGI FURTHER reduces your allowed Roth contribution for 2017, and leaves you with a small 6% excise tax for 2017. Vanguard probably did not explain this, and while they did not have the amount of earnings returned at the time, they might have mentioned this "chicken and egg" scenario. Again, the further reduction depends on the amount of earnings and the rounding rules that determine the allowed regular Roth contribution. If you owe any 6% excise tax, then you will need a Form 5329 with the 1040X to document the amount of excess. This is not costly, but is definitely a reporting hassle.

You can eliminate the hassle of the MAGI phaseout range by doing a back door Roth if you do not have a non Roth IRA balance. That avoids any excess contributions due to income phaseout.

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UpsetRaptor
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Re: How To Fix Excess Roth Removal With Amended Return

Post by UpsetRaptor » Sat Feb 09, 2019 4:57 pm

Alan S. wrote:
Fri Feb 08, 2019 3:35 pm
UpsetRaptor wrote:
Fri Feb 08, 2019 12:47 pm
Scenario:
- Jan 2017 I contributed $5500 to Roth IRA for each myself + spouse.
- Unexpected income in late 2017
- Tax time 2018, find our 2017 AGI was ~$187K, so a little bit into the Roth IRA phase-out window for MFJ.
- Mar 2018 I work with Vanguard. They calculate the excess plus earnings, and that total, minus a little bit of taxes withheld, is withdrawn. Total's around $1K for each of us. No recharacterization or conversion (existing tIRAs), just straight removed the excess plus earnings. Vanguard says nothing else to do for now, you'll get a 1099-R in early 2019.
- Feb 2019 I have 1099-R now, importing into 2018 taxes.
- Tax software says "This distribution was taxable in 2017, not 2018" and you'll need to amend your 2017 return.

Is that last point true? I was thinking/hoping I could just file it with this year's return. If so, how do I go about amending the 2017 return at this point - what form to use, etc?
Yes, the earnings returned with your excess removal is taxable for the year IN WHICH you made the contribution, which was 2017. As such the 1099R you received would be coded P in Box 7, and probably code J as well if you are under 59.5. Therefore, the Box 2a amount is taxable in 2017 and unless you qualify for a penalty waiver you owe a 10% penalty on the amount in Box 2a.

To report this, you would need to file a 1040X (amended return) for 2017, adding the taxable income and paying the penalty, if applicable. On the other hand, since this applies to 2017, you would NOT report any of this with your 2018 return.

You might also find that the Box 2a amount if large enough, when added to your 2017 AGI FURTHER reduces your allowed Roth contribution for 2017, and leaves you with a small 6% excise tax for 2017. Vanguard probably did not explain this, and while they did not have the amount of earnings returned at the time, they might have mentioned this "chicken and egg" scenario. Again, the further reduction depends on the amount of earnings and the rounding rules that determine the allowed regular Roth contribution. If you owe any 6% excise tax, then you will need a Form 5329 with the 1040X to document the amount of excess. This is not costly, but is definitely a reporting hassle.

You can eliminate the hassle of the MAGI phaseout range by doing a back door Roth if you do not have a non Roth IRA balance. That avoids any excess contributions due to income phaseout.
Alan,

Thank you so much for your ever-useful responses. I'm not sure what you do, but you're clearly a tax guru!

The 1099Rs are indeed coded PJ in box 7. I have filled out a 1040x amended return for 2017. I have $138 earnings to add to my 2017 AGI, which increased my tax liability a whopping $38. This seems straightforward so far, like I could just mail this plus a check, until we get to the tax penalties you mention. I'm reading pub 590.

From: https://www.irs.gov/pub/irs-prior/p590a--2017.pdf page 44
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 timely filed your 2017 tax return without withdrawing a contribution that you made in 2017, you can still
have the contribution returned to you within 6 months of
the due date of your 2017 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any
related earnings on the amended return and include an
explanation of the withdrawal. Make any other necessary
changes on the amended return.
Since I withdrew contributions+interest back in March 2018 before the tax filing deadline, I read the above "treated as an amount not contributed" as indicating there wouldn't be a penalty on it. No?

I see what you're saying with the chicken-and-egg thing with reduced Roth contribution limits. By my math, the extra $138 income just re-lowered each of our Roth IRA contribution limits for 2017, from $4570 to $4490. Looks like Vanguard removed enough, after accounting for the earnings, to put our 2017 contributions at $4565, so it would appear as though we're now sitting on an overcontribution of $75 each, after re-calculating everything. Can I just pay 6% on this in Part IV of a 5329 and be done? Sure hope I don't have to go back to Vanguard and re-do this whole process over such a small amount of $.

I have zero concerns with paying 10% or 6% or anything on the small amounts involved here, just want to do everything right, and as clean as possible. If the answer is "just to be safe, i'd file a 5329 and pay 10% on all Box 2 earnings in plus 6% in Part IV" and be done with it, that's fine. If the answer is go back to Vanguard and re-do this for $75, well I don't like that answer but if it's gotta happen...

PS - We have tIRAs that impede Roth conversions. That sure would have been nice, to avoid all this.

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samsoes
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Re: How To Fix Excess Roth Removal With Amended Return

Post by samsoes » Sat Feb 09, 2019 6:19 pm

I'll be really close to the phaseout amount for 2019,
(single filer). As a result, I've decided to wait until tax time 2020 to make my Roth contribution for 2019 in order to avoid situations such as this.

It amazes me that there's always a thread on this site, every year, asking who funds their Roth IRA for the new year on Jan 2.

Patience, padawan.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

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UpsetRaptor
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Re: How To Fix Excess Roth Removal With Amended Return

Post by UpsetRaptor » Sun Feb 10, 2019 10:22 am

samsoes wrote:
Sat Feb 09, 2019 6:19 pm
I'll be really close to the phaseout amount for 2019,
(single filer). As a result, I've decided to wait until tax time 2020 to make my Roth contribution for 2019 in order to avoid situations such as this.

It amazes me that there's always a thread on this site, every year, asking who funds their Roth IRA for the new year on Jan 2.

Patience, padawan.
Well, lump-sum funding early each year will come out ahead in the long run, adding some extra gains. For me, this was a one-time unexpected income addition that put only a small portion of one year's Roth contribution in excess.

Alan S.
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Re: How To Fix Excess Roth Removal With Amended Return

Post by Alan S. » Wed Feb 13, 2019 1:41 pm

UpsetRaptor wrote:
Sat Feb 09, 2019 4:57 pm

Since I withdrew contributions+interest back in March 2018 before the tax filing deadline, I read the above "treated as an amount not contributed" as indicating there wouldn't be a penalty on it. No?

There wouldn't be a 6% excise tax on most of the excess, since you removed MOST OF the excess contribution. But the addition of the 138 of earnings has left you with a small excess of $80 each. The deadline has now passed so you cannot re do this and would not contact VG again. You would have to file a 2017 5329 for each of you (form only holds one SSN) and pay the 6% of $75, which is only $5 each. Include each 5329 with your 2017 1040X.

In Part I of those same 5329 forms, you would each owe a 10% early withdrawal penalty on the 138 of earnings unless you qualify for a penalty exception. That would amount to $14 each. Finally, due to the additional 138 of taxable income for 2017, you probably owe a little more income tax which you would calculate on the 1040X.


I see what you're saying with the chicken-and-egg thing with reduced Roth contribution limits. By my math, the extra $138 income just re-lowered each of our Roth IRA contribution limits for 2017, from $4570 to $4490. Looks like Vanguard removed enough, after accounting for the earnings, to put our 2017 contributions at $4565, so it would appear as though we're now sitting on an overcontribution of $75 each, after re-calculating everything. Can I just pay 6% on this in Part IV of a 5329 and be done? Sure hope I don't have to go back to Vanguard and re-do this whole process over such a small amount of $.

I have zero concerns with paying 10% or 6% or anything on the small amounts involved here, just want to do everything right, and as clean as possible. If the answer is "just to be safe, i'd file a 5329 and pay 10% on all Box 2 earnings in plus 6% in Part IV" and be done with it, that's fine. If the answer is go back to Vanguard and re-do this for $75, well I don't like that answer but if it's gotta happen...

I suggest that you first complete those 2017 5329 forms, as they are needed to complete your 2018 5329s, since you still have $75 excess Roth contributions carried over. The 1099R you received does not affect your 2018 taxes, EXCEPT that you mentioned there was some withholding taken out. That would be 2018 withholding, so remember to take credit for that on your 2018 return.

What happens to the 75 excess depends on what contributions or distributions you made for 2018. Please advise if you have done either. Form 5329 will apply the excess to 2018 Roth contributions that you were eligible for but did not make, or if you took any 2018 distributions those would also clear out the 75 excess. Either of these would eliminate the 6% excise tax for 2018, but you still need to file the 2018 5329 with your return to show that your excess either remains or was eliminated


PS - We have tIRAs that impede Roth conversions. That sure would have been nice, to avoid all this.

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Re: How To Fix Excess Roth Removal With Amended Return

Post by UpsetRaptor » Thu Feb 14, 2019 1:54 pm

Alan S. wrote:
Wed Feb 13, 2019 1:41 pm
UpsetRaptor wrote:
Sat Feb 09, 2019 4:57 pm

Since I withdrew contributions+interest back in March 2018 before the tax filing deadline, I read the above "treated as an amount not contributed" as indicating there wouldn't be a penalty on it. No?

There wouldn't be a 6% excise tax on most of the excess, since you removed MOST OF the excess contribution. But the addition of the 138 of earnings has left you with a small excess of $80 each. The deadline has now passed so you cannot re do this and would not contact VG again. You would have to file a 2017 5329 for each of you (form only holds one SSN) and pay the 6% of $75, which is only $5 each. Include each 5329 with your 2017 1040X.

In Part I of those same 5329 forms, you would each owe a 10% early withdrawal penalty on the 138 of earnings unless you qualify for a penalty exception. That would amount to $14 each. Finally, due to the additional 138 of taxable income for 2017, you probably owe a little more income tax which you would calculate on the 1040X.


I see what you're saying with the chicken-and-egg thing with reduced Roth contribution limits. By my math, the extra $138 income just re-lowered each of our Roth IRA contribution limits for 2017, from $4570 to $4490. Looks like Vanguard removed enough, after accounting for the earnings, to put our 2017 contributions at $4565, so it would appear as though we're now sitting on an overcontribution of $75 each, after re-calculating everything. Can I just pay 6% on this in Part IV of a 5329 and be done? Sure hope I don't have to go back to Vanguard and re-do this whole process over such a small amount of $.

I have zero concerns with paying 10% or 6% or anything on the small amounts involved here, just want to do everything right, and as clean as possible. If the answer is "just to be safe, i'd file a 5329 and pay 10% on all Box 2 earnings in plus 6% in Part IV" and be done with it, that's fine. If the answer is go back to Vanguard and re-do this for $75, well I don't like that answer but if it's gotta happen...

I suggest that you first complete those 2017 5329 forms, as they are needed to complete your 2018 5329s, since you still have $75 excess Roth contributions carried over. The 1099R you received does not affect your 2018 taxes, EXCEPT that you mentioned there was some withholding taken out. That would be 2018 withholding, so remember to take credit for that on your 2018 return.

What happens to the 75 excess depends on what contributions or distributions you made for 2018. Please advise if you have done either. Form 5329 will apply the excess to 2018 Roth contributions that you were eligible for but did not make, or if you took any 2018 distributions those would also clear out the 75 excess. Either of these would eliminate the 6% excise tax for 2018, but you still need to file the 2018 5329 with your return to show that your excess either remains or was eliminated


PS - We have tIRAs that impede Roth conversions. That sure would have been nice, to avoid all this.
I have already filed our 2018 taxes. I checked them and they did include the small 1099R tax withholdings. I'd used tax software (H&R Block) and imported the 1099Rs, and looks like the software handled it as you say - included the 1099R tax withheld in 2018 but not the income, and notified me to re-do 2017 with the new income.

Also I made full $5500 Roth contribution for each of us January 2018, and $6000 Jan 2019, which I now realize adds some more paperwork. But I think I understand what I need to do now:

1) File 2017 1040X amended return to include additional $138 income from the 1099R Box 2 earnings, re-calculate tax.
2) File 2017 5329 for each me+spouse
-- Include 10% penalty on each of our 1099R Box2 earnings in Part I ($81x.01=$8 + $57x.01=$6, total $14)
-- Include 6% penalty on "new" excess Roth contribution amount of $75 in Part IV ($5 x 2 = $10)
3) Eventually file a 5329 for each 2018 and 2019 for each of us with the 6% penalty on carried excess of $75 ($10)
Edit: I sure hope Uncle Sam doesn't spend all this extra money in one place! :D
4) In 2020 contribute $5925 each (assuming Max Roth contribution is $6000), so the carried $75 excess goes into 2020 contribution and is eliminated.

^ That all right? If so, questions:
- I assume 1)+2) can all be filed together, with one check for it all?
- For 3) can I file these whenever, standalone?
- For 4) Is there any paperwork involved or will it automagically happen?

Really really appreciate all the help Alan!

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Epsilon Delta
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Re: How To Fix Excess Roth Removal With Amended Return

Post by Epsilon Delta » Thu Feb 14, 2019 6:10 pm

UpsetRaptor wrote:
Thu Feb 14, 2019 1:54 pm

3) Eventually file a 5329 for each 2018 and 2019 for each of us with the 6% penalty on carried excess of $75 ($10)

4) In 2020 contribute $5925 each (assuming Max Roth contribution is $6000), so the carried $75 excess goes into 2020 contribution and is eliminated.

- For 4) Is there any paperwork involved or will it automagically happen?

Really really appreciate all the help Alan!
You should look at Part IV of form f5329. Line 19 is where you credit the carried forward excess contribution to the current year. If you use the 2019 form 5329 to credit the prior excess to 2019 you will not owe a 6% penalty for 2019 (or later).

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Re: How To Fix Excess Roth Removal With Amended Return

Post by UpsetRaptor » Thu Feb 14, 2019 8:44 pm

Epsilon Delta wrote:
Thu Feb 14, 2019 6:10 pm
UpsetRaptor wrote:
Thu Feb 14, 2019 1:54 pm

3) Eventually file a 5329 for each 2018 and 2019 for each of us with the 6% penalty on carried excess of $75 ($10)

4) In 2020 contribute $5925 each (assuming Max Roth contribution is $6000), so the carried $75 excess goes into 2020 contribution and is eliminated.

- For 4) Is there any paperwork involved or will it automagically happen?

Really really appreciate all the help Alan!
You should look at Part IV of form f5329. Line 19 is where you credit the carried forward excess contribution to the current year. If you use the 2019 form 5329 to credit the prior excess to 2019 you will not owe a 6% penalty for 2019 (or later).
Ok yeah, I see that. I already contributed $6K for 2019 though, so I’ll have to do it in 2020, right? The 6% penalty on $75 for 2018 and 2019 is just $5 each, don’t care about that.

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Epsilon Delta
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Re: How To Fix Excess Roth Removal With Amended Return

Post by Epsilon Delta » Thu Feb 14, 2019 11:37 pm

UpsetRaptor wrote:
Thu Feb 14, 2019 8:44 pm
Epsilon Delta wrote:
Thu Feb 14, 2019 6:10 pm
UpsetRaptor wrote:
Thu Feb 14, 2019 1:54 pm

3) Eventually file a 5329 for each 2018 and 2019 for each of us with the 6% penalty on carried excess of $75 ($10)

4) In 2020 contribute $5925 each (assuming Max Roth contribution is $6000), so the carried $75 excess goes into 2020 contribution and is eliminated.

- For 4) Is there any paperwork involved or will it automagically happen?

Really really appreciate all the help Alan!
You should look at Part IV of form f5329. Line 19 is where you credit the carried forward excess contribution to the current year. If you use the 2019 form 5329 to credit the prior excess to 2019 you will not owe a 6% penalty for 2019 (or later).
Ok yeah, I see that. I already contributed $6K for 2019 though, so I’ll have to do it in 2020, right? The 6% penalty on $75 for 2018 and 2019 is just $5 each, don’t care about that.
Your right, I misread the years.

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Re: How To Fix Excess Roth Removal With Amended Return

Post by Pax » Sat Feb 16, 2019 2:05 pm

Hi!
I posted a very similar situation.

Question:
"1) File 2017 1040X amended return to include additional $138 income from the 1099R Box 2 earnings, re-calculate tax."
Do you use a 1099-R that you create just for this?

I found this *other* approach but I have not been able to confirm that it is correct:
[No NEED to Amend 2017 with an 1040X ?!

I found this in the Turbo Tax Q&A Forum, which is my case.

Excess Roth IRA contribution made in 2017 and withdrawn before filing in 2018. When and how do I pay taxes on any earnings?
Oct-17 - Contribute more than our income into Roth IRA Jan-18 - Withdraw excess and reinvest as 2018 contribution.Jan-18 - Financial reports principal and earnings withdrawn.I've seen TurboTax say to report taxes in 2019 for tax year 2018 after receiving 1099-R.Also, I've seen TurboTax say to enter a mock 1099-R for tax year 2017.When and how do I pay taxes on the earnings?

Recommended Answer
*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2017 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution - then:You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/of box 12 State withholding. Then you must enter the 2018 1099-R in to the 2018 tax return since the withholding is reported in the year that the tax was withheld. The 2018 code P will not do anything in 2018 but the withholding will be applied to 2018.You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),The earnings in box 2a,Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2016 << I THINK HE MEANT TO SAY 2017 HERE - PAX COMMENT> "Enter code "J" in box 7 (Bottom).On the "Which year" screen say that this is a 2018 1099-R.After the 1099-R summary screen press continue.If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings. Enter the explanation for the excess contribution and that you are reporting a 2018 1099-R on your 2017 tax return to avoid having to amend in 2018.The box 2a earnings will be taxable income reported on line 15b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 form.

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