Roth Overcontribution - What do I need to do on this year's return

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SC Anteater
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Roth Overcontribution - What do I need to do on this year's return

Post by SC Anteater »

I accidentally overcontributed to my Roth last year. I removed the overcontribution in January of this year. I understand I will receive a 1099-R for the 2021 tax year. What do I need to do on 2020's tax return -- anything?
prairieman
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by prairieman »

Not an expert on this, but I am becoming one. I made excess contributions for myself and wife in Dec. 2017 and reversed in March 2018. I goofed up with TurboTax and forgot to record the reversal. The program looked back each of the years since and reported a 6% penalty on the excess amount - and I was too hurried to notice.
If I were you, I’d report nothing - since you did reverse it before filing your taxes.
“As long as the roots are not severed, all is well.” Chauncey Gardner
fettarules
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by fettarules »

You should have received a letter from your IRA administrator showing any investment gain or loss generated by the excess contribution --- that amount is treated as income and needs to be included in your 2020 return. Other than that you are good.
cas
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by cas »

SC Anteater wrote: Mon Apr 19, 2021 12:10 pm I accidentally overcontributed to my Roth last year. I removed the overcontribution in January of this year. I understand I will receive a 1099-R for the 2021 tax year. What do I need to do on 2020's tax return -- anything?
I'm guessing that when you say you "removed" the contribution and will get a 1099-R for 2021, you did what the IRS calls a "return of contribution". I am also guessing that the contribution made in 2020 was *for* 2020 (and NOT *for* 2019 but made *in* 2020). (There are, however, other things you could have done, such as a "recharacterization," and other years you could have done them *for*, so make sure you are sure what exactly you did before bothering with the following links.)

For the definitive answer, the IRS instructions for reporting "Return of IRA Contribution" are here, with example: Instructions for Form 8606 -> Return of IRA Contribution
If, in 2020, you made traditional IRA contributions or Roth IRA contributions for 2020 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2020 tax return, the returned contributions are treated as if they were never contributed.

Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution.

However, you must include the amount of the distribution of the returned contributions you made in 2020 and any related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4a.

Also include the related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4b.

Attach a statement explaining the distribution.

Also, if you were under age 59½ at the time of a distribution with related earnings, you generally are subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts).
A useful example follows those paragraphs, giving more details on the "statement" etc, so do click on the link and read the whole thing.

Also, if you are using tax sofware, you may run into the issue that you won't get the 1099-R until January 2022, but you need it now to enter for your 2020 tax return. You may be interested in this thread, where forum expert Alan S. discusses what to put on a "dummy" 1099-R to enter into your tax software: viewtopic.php?f=1&t=341943&newpost=5858293

However, note that the OP in that thread was older than 59 1/2. If you are less than 59 1/2, the code in Box 7 of the 1099-R will be slighly different (or an additional letter/number or something.) However my brain is fried for today, so I'll just direct you to 1099-R Box 7 Codes to figure that out for yourself (in the event your tax software insists on a dummy 1099-R and are less than 59 1/2.)
prairieman
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by prairieman »

I’ll note that by “reversed”, I assume it was done so correctly. Any income gained from the invested funds would be withdrawn from your Roth and reported as such by your brokerage company (Vanguard in my case). When I went through this, everything was done correctly in that regard - but I incorrectly reported a non-zero Roth contribution to TurboTax that amounted to 6500 each for myself and my wife. This silently carried over into each of the next two years. I am amending 2017 to 2019 taxes as I type this and am just glad I caught it before filing my 2020 taxes.
“As long as the roots are not severed, all is well.” Chauncey Gardner
Topic Author
SC Anteater
Posts: 376
Joined: Thu Jan 10, 2019 6:50 pm

Re: Roth Overcontribution - What do I need to do on this year's return

Post by SC Anteater »

cas wrote: Mon Apr 19, 2021 3:19 pm
SC Anteater wrote: Mon Apr 19, 2021 12:10 pm I accidentally overcontributed to my Roth last year. I removed the overcontribution in January of this year. I understand I will receive a 1099-R for the 2021 tax year. What do I need to do on 2020's tax return -- anything?
I'm guessing that when you say you "removed" the contribution and will get a 1099-R for 2021, you did what the IRS calls a "return of contribution". I am also guessing that the contribution made in 2020 was *for* 2020 (and NOT *for* 2019 but made *in* 2020). (There are, however, other things you could have done, such as a "recharacterization," and other years you could have done them *for*, so make sure you are sure what exactly you did before bothering with the following links.)

For the definitive answer, the IRS instructions for reporting "Return of IRA Contribution" are here, with example: Instructions for Form 8606 -> Return of IRA Contribution
If, in 2020, you made traditional IRA contributions or Roth IRA contributions for 2020 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2020 tax return, the returned contributions are treated as if they were never contributed.

Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution.

However, you must include the amount of the distribution of the returned contributions you made in 2020 and any related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4a.

Also include the related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4b.

Attach a statement explaining the distribution.

Also, if you were under age 59½ at the time of a distribution with related earnings, you generally are subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts).
A useful example follows those paragraphs, giving more details on the "statement" etc, so do click on the link and read the whole thing.

Also, if you are using tax sofware, you may run into the issue that you won't get the 1099-R until January 2022, but you need it now to enter for your 2020 tax return. You may be interested in this thread, where forum expert Alan S. discusses what to put on a "dummy" 1099-R to enter into your tax software: viewtopic.php?f=1&t=341943&newpost=5858293

However, note that the OP in that thread was older than 59 1/2. If you are less than 59 1/2, the code in Box 7 of the 1099-R will be slighly different (or an additional letter/number or something.) However my brain is fried for today, so I'll just direct you to 1099-R Box 7 Codes to figure that out for yourself (in the event your tax software insists on a dummy 1099-R and are less than 59 1/2.)
Thanks, very helpful. Yes, I removed the contribution and associated earnings from Vanguard from a 2020 overcontribution. I did this in January 2021. I'll read up on the links you provided.
Topic Author
SC Anteater
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Joined: Thu Jan 10, 2019 6:50 pm

Re: Roth Overcontribution - What do I need to do on this year's return

Post by SC Anteater »

prairieman wrote: Mon Apr 19, 2021 4:25 pm I’ll note that by “reversed”, I assume it was done so correctly. Any income gained from the invested funds would be withdrawn from your Roth and reported as such by your brokerage company (Vanguard in my case). When I went through this, everything was done correctly in that regard - but I incorrectly reported a non-zero Roth contribution to TurboTax that amounted to 6500 each for myself and my wife. This silently carried over into each of the next two years. I am amending 2017 to 2019 taxes as I type this and am just glad I caught it before filing my 2020 taxes.
I certainly hope Vanguard did it correctly! So you are saying I should report the allowed amount of Roth contribution (which is something like $500 for me/spouse) on my tax return?
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Duckie
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by Duckie »

SC Anteater wrote: Mon Apr 19, 2021 12:10 pm I understand I will receive a 1099-R for the 2021 tax year. What do I need to do on 2020's tax return -- anything?
See the 2020 Form 8606 instructions starting on page 5:
  • "Return of IRA Contributions
    If, in 2020, you made traditional IRA contributions or Roth IRA contributions for 2020 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2020 tax return, the returned contributions are treated as if they were never contributed. Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2020 and any related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4a. Also include the related earnings on your 2020 Form 1040, 1040-SR, or 1040-NR, line 4b. Attach a statement explaining the distribution. Also, if you were under age 59.5 at the time of a distribution with related earnings, you generally are subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts)."
So the total amount returned goes on Form 1040 line 4a, the taxable earnings go on line 4b, and you need to add a statement.

If under age 59.5 at the time of the withdrawal, next year you will also need to fill out the 2021 Form 5329 Part I to figure the 10% penalty. Line 4 will flow to Schedule 2 line 6 which will flow to Form 1040 line 23.
Last edited by Duckie on Sat Apr 24, 2021 9:05 pm, edited 1 time in total.
prairieman
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Re: Roth Overcontribution - What do I need to do on this year's return

Post by prairieman »

SC Anteater wrote: Mon Apr 19, 2021 5:12 pm
prairieman wrote: Mon Apr 19, 2021 4:25 pm I’ll note that by “reversed”, I assume it was done so correctly. Any income gained from the invested funds would be withdrawn from your Roth and reported as such by your brokerage company (Vanguard in my case). When I went through this, everything was done correctly in that regard - but I incorrectly reported a non-zero Roth contribution to TurboTax that amounted to 6500 each for myself and my wife. This silently carried over into each of the next two years. I am amending 2017 to 2019 taxes as I type this and am just glad I caught it before filing my 2020 taxes.


I certainly hope Vanguard did it correctly! So you are saying I should report the allowed amount of Roth contribution (which is something like $500 for me/spouse) on my tax return?
My wife and I had no earned income when we did it, so every penny of the Roth contribution was in excess. I am not sure how TurboTax and Vanguard handle it if some of the contribution was allowed and some was not.
“As long as the roots are not severed, all is well.” Chauncey Gardner
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