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Due to my income in 2019, I exceeded the Roth IRA contribution limits. Now I am trying to figure out how much to withdraw and how to report it. I have an account with Vanguard. So I have the following questions:

  1. How much to withdraw?

I contributed (excess) $1,000 on 04/18/2019.

Balance at the end of 04/17/19: $4,468.32
Balance at the end of 04/18/19: $5,470.49
Balance today(02/18/20): $6,445.79

How do I compute the total amount to withdraw?(I followed the example at https://www.irs.gov/publications/p590a#en_US_2019_publink1000230704)?

1,000 X [(6,445.79 - 4,468.32) / 4,468.32] = 178.751426

Total to Withdraw: 1,000 + 178.75 = $1,178.75

Is this right ?

  1. Since I am less than the Roth IRA withdrawal age, I expect there to be penalty for early withdrawal plus the taxes on the earnings. How do I calculate these taxes ? Do I calculate these ? Does Vanguard do it for me?

  2. When do I report this excess contribution removal ? In the 2019 taxes or in the 2020 taxes.

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Neardupe Where to enter earnings income when correcting excess Roth IRA contributions? (which I just updated).

  1. How much to withdraw? .... Is this right?

It looks right to me, but when you request this Vanguard should (re)compute it for you, using the figures for the date the correction is executed. (AFAIK all IRA custodians do this, but you asked about Vanguard. Note you need to tell the custodian this is a correction/removal, NOT a normal distribution, so they can report it on 1099-R correctly.)

  1. Since I am less than the Roth IRA withdrawal age, I expect there to be penalty for early withdrawal plus the taxes on the earnings. How do I calculate these taxes ? Do I calculate these ? Does Vanguard do it for me?

As above, Vanguard should compute the earnings. You put the earnings on form 5329 part I to compute the 10% tax (and carry it to 1040 schedule 2, which in turn carries to the basic 1040), and also put the distribution and earnings respectively on form 1040 line 4a and 4b -- and "attach a statement explaining the distribution", see the instructions for form 8606 -- which causes the earnings to be included in your taxable income when you continue with the usual tax computation on the rest of the form. Although the addtional tax is flat-rate, normal US income tax is nowhere near, so it is effectively impossible to compute the income tax on separate pieces of your income separately.

  1. When do I report this excess contribution removal ? In the 2019 taxes or in the 2020 taxes.

2019.


Also, in case you weren't aware, even if you are over the limit to contribute to Roth, in which case you are often also over the limit to deduct a trad IRA contribution, you can recharacterize last year's contribution as a nondeductible trad IRA contribution, and then convert the trad IRA to Roth with no income limit -- this is called backdoor Roth and there are numerous other Qs about it. If you don't already have (much) other trad-IRA pretax money (deductible contributions plus all earnings), the effect almost is the same as doing Roth directly: the nondeductible contribution 'basis' is not taxed when converted, and the earnings are taxed as ordinary income (but no 10% penalty) in the year converted, which would be 2020 (or later if you wait) not 2019. But if you do have trad IRA pretax money already, unless you convert all of it, you can avoid tax on only a pro-rata part of the basis and must leave the rest for the future, making this approach less attractive.

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  • Thanks a lot for this info - it clarified lot of confusions but I do have a question. When I try to withdraw the excess contribution from Vanguard, they also ask federal/state taxes to be withheld(optionally). In which cases would I tell them to withhold taxes ? Based on what I understand from your answer, the taxes will be computed & taken out already when I fill out 2019 taxes? Wouldn't it be double taxing ? – oneCoderToRuleThemAll Feb 25 at 0:08
  • Income-tax withholding is always an estimate, with the actual tax computed only on your return (except for some non-resident aliens) and you only pay once -- per tax; in this case the earnings part of your correction is subject to both normal income tax and the additional 10% tax on 5329, which are two different taxes, not two payments of the same tax. The difference between withholding and actual tax is really basic; I don't understand how you can have lived here and participated in the economy without knowing this. ... – dave_thompson_085 Feb 25 at 6:08
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    ... But I don't think VG can backdate withholding for a correction, especially since their form 945 should already be filed, and getting withholding now (for 2020) does you no good. And even if they could, your tax on ~$200 (even with the 10% additional) is small. So keep it simple: don't withhold for this, just compute the (combined total of exact) taxes on your return and pay any part not already paid by withholding or estimated. – dave_thompson_085 Feb 25 at 6:11
  • Just to make sure I understand, I should compute my tax return(along with 5329) and if I owe any money at the end, I should withhold that ? – oneCoderToRuleThemAll Feb 25 at 23:58
  • You should complete your return. On line 16 it computes the tax you should pay, and on line 19 it computes what you did pay aleady (e.g. payroll withholding). If you paid more than needed, on line 20 you compute line 19 minus line 16 as the refund you get. If you paid less than needed, on line 23 you compute line 16 minus line 19 as the amount you still owe, and then pay it. There are many options for payment, which are described in the instructions and on the IRS website -- just go to www.irs.gov and click 'Pay', they really try to make it easy. – dave_thompson_085 Feb 27 at 7:37

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