Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Macaroni2314
Posts: 250
Joined: Fri Mar 31, 2023 5:31 am

Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by Macaroni2314 »

Hi,

I'm (a non CPA) doing my friend's tax returns for 2023. He asked me a question about his 2021 return.

He told me despite being over the $160k MAGI limit in 2021 for single filers, he contributed a couple thousand dollars to his Roth IRA due to misunderstanding his accountant at the time.

I have tried Googling and reading about this on Bogleheads, but I'm still confused.

What is the right course of action for him now? What are his options?

Thanks for your help.
toddthebod
Posts: 5219
Joined: Wed May 18, 2022 12:42 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by toddthebod »

Macaroni2314 wrote: Sun Feb 11, 2024 6:11 pm Hi,

I'm (a non CPA) doing my friend's tax returns for 2023. He asked me a question about his 2021 return.

He told me despite being over the $160k MAGI limit in 2021 for single filers, he contributed a couple thousand dollars to his Roth IRA due to misunderstanding his accountant at the time.

I have tried Googling and reading about this on Bogleheads, but I'm still confused.

What is the right course of action for him now? What are his options?

Thanks for your help.
He needs to amend his 2021 return to include Form 5329 and pay a 6% excise tax on the contribution. He will also need to amend his 2022 return, as he needs to continue filing form 5329 (and paying taxes on excess contributions) every year until he no longer as an excess contribution. This can be accomplished in two ways: 1. If he is eligible to contribute to a Roth in a subsequent year, he can "absorb" the earlier contribution into that year's limit. 2. He can withdraw the funds. He will have to file a final form 5329 in the year he withdraws or absorbs the excess contribution showing that there are no excess contributions remaining. He'll also have to pay the early distribution penalty if he withdraws the funds.

https://www.irs.gov/pub/irs-pdf/f5329.pdf
See part IV. (Also part I in the year he withdraws the funds.)
Backtests without cash flows are meaningless. Returns without dividends are lies.
SevenBridgesRoad
Posts: 1173
Joined: Sat Jul 07, 2018 12:14 am

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by SevenBridgesRoad »

Macaroni2314 wrote: Sun Feb 11, 2024 6:11 pm Hi,

I'm (a non CPA) doing my friend's tax returns for 2023. He asked me a question about his 2021 return.

He told me despite being over the $160k MAGI limit in 2021 for single filers, he contributed a couple thousand dollars to his Roth IRA due to misunderstanding his accountant at the time.

I have tried Googling and reading about this on Bogleheads, but I'm still confused.

What is the right course of action for him now? What are his options?

Thanks for your help.
Are you stepping into the danger zone? Non CPA trying to help out, but now things are a bit beyond you. Friend appears to have the money for a CPA to do his taxes. Good rule of thumb: no good deed goes unpunished.
Topic Author
Macaroni2314
Posts: 250
Joined: Fri Mar 31, 2023 5:31 am

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by Macaroni2314 »

SevenBridgesRoad wrote: Sun Feb 11, 2024 6:34 pm Are you stepping into the danger zone? Non CPA trying to help out, but now things are a bit beyond you. Friend appears to have the money for a CPA to do his taxes. Good rule of thumb: no good deed goes unpunished.
You're right--I've told him this is out of my range of abilities in light of the other person's comment here.

I've referred him to a CPA.
friar1610
Posts: 2322
Joined: Sat Nov 29, 2008 8:52 pm
Location: MA South Shore

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by friar1610 »

My daughter does her own taxes using TT. She just discovered that, due to a lot of overtime in 2023, her earnings had exceeded the upper limit for Roths and she had over contributed to her Roth. She simply called her custodian (Fidelity) and they recharacterized the contributions as deposits to her taxable brokerage account in about 2 days.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
Topic Author
Macaroni2314
Posts: 250
Joined: Fri Mar 31, 2023 5:31 am

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by Macaroni2314 »

friar1610 wrote: Sun Feb 11, 2024 7:09 pm My daughter does her own taxes using TT. She just discovered that, due to a lot of overtime in 2023, her earnings had exceeded the upper limit for Roths and she had over contributed to her Roth. She simply called her custodian (Fidelity) and they recharacterized the contributions as deposits to her taxable brokerage account in about 2 days.
Thanks for explaining this. Has she filed her 2023 return yet? So maybe this was okay because she didn't file yet?

My concern for my friend is that he did this for tax year 2021? I'm confused about the ramifications (and have thus referred him to a CPA), but I'm glad to have this discussion here for anyone who is going to read this thread in the future.
toddthebod
Posts: 5219
Joined: Wed May 18, 2022 12:42 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by toddthebod »

friar1610 wrote: Sun Feb 11, 2024 7:09 pm My daughter does her own taxes using TT. She just discovered that, due to a lot of overtime in 2023, her earnings had exceeded the upper limit for Roths and she had over contributed to her Roth. She simply called her custodian (Fidelity) and they recharacterized the contributions as deposits to her taxable brokerage account in about 2 days.
That ship has sailed. You cannot recharacterize or request a return of excess contributions three years later.
Backtests without cash flows are meaningless. Returns without dividends are lies.
Topic Author
Macaroni2314
Posts: 250
Joined: Fri Mar 31, 2023 5:31 am

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by Macaroni2314 »

toddthebod wrote: Sun Feb 11, 2024 7:36 pm
That ship has sailed. You cannot recharacterize or request a return of excess contributions three years later.
When does that ship sail just out of curiosity? Is it before the tax filing deadline of that year?
toddthebod
Posts: 5219
Joined: Wed May 18, 2022 12:42 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by toddthebod »

Macaroni2314 wrote: Sun Feb 11, 2024 7:47 pm
toddthebod wrote: Sun Feb 11, 2024 7:36 pm
That ship has sailed. You cannot recharacterize or request a return of excess contributions three years later.
When does that ship sail just out of curiosity? Is it before the tax filing deadline of that year?
I believe it's after the deadline including extension, so October 15th most years.
Backtests without cash flows are meaningless. Returns without dividends are lies.
Topic Author
Macaroni2314
Posts: 250
Joined: Fri Mar 31, 2023 5:31 am

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by Macaroni2314 »

toddthebod wrote: Sun Feb 11, 2024 7:55 pm I believe it's after the deadline including extension, so October 15th most years.
Got it, thanks!!!
funxional
Posts: 262
Joined: Thu Oct 27, 2022 4:29 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by funxional »

toddthebod wrote: Sun Feb 11, 2024 7:55 pm
Macaroni2314 wrote: Sun Feb 11, 2024 7:47 pm
toddthebod wrote: Sun Feb 11, 2024 7:36 pm
That ship has sailed. You cannot recharacterize or request a return of excess contributions three years later.
When does that ship sail just out of curiosity? Is it before the tax filing deadline of that year?
I believe it's after the deadline including extension, so October 15th most years.
Another question, is it October 15 for everyone or is it when you file? Ie I couldn't file Apr 15 but still make changes after without refiling?
toddthebod
Posts: 5219
Joined: Wed May 18, 2022 12:42 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by toddthebod »

funxional wrote: Sun Feb 11, 2024 7:59 pm
toddthebod wrote: Sun Feb 11, 2024 7:55 pm
Macaroni2314 wrote: Sun Feb 11, 2024 7:47 pm
toddthebod wrote: Sun Feb 11, 2024 7:36 pm
That ship has sailed. You cannot recharacterize or request a return of excess contributions three years later.
When does that ship sail just out of curiosity? Is it before the tax filing deadline of that year?
I believe it's after the deadline including extension, so October 15th most years.
Another question, is it October 15 for everyone or is it when you file? Ie I couldn't file Apr 15 but still make changes after without refiling?
I think you only have until October 15 if you file for an extension. I don't think it's automatic.
Backtests without cash flows are meaningless. Returns without dividends are lies.
funxional
Posts: 262
Joined: Thu Oct 27, 2022 4:29 pm

Re: Doing friend's tax return. In 2021, he contributed to Roth IRA despite being over income limit

Post by funxional »

toddthebod wrote: Sun Feb 11, 2024 8:03 pm
I think you only have until October 15 if you file for an extension. I don't think it's automatic.
Thanks. That's what I figured but isn't usually mentioned.
Post Reply