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Please help!!

I contributed $6000 to Roth IRA in 11/3/2020. In 12/22/2020 I contributed to Traditional IRA $6000 (I did not know that $6000 was for the combination of Roth and Traditional). In 1/14/2021, I converted my $6000 Traditional to Roth (I have 1099-R). Also, in 5/25/2021 I contributed $6000 to my Roth and in the same day, I contributed $6000 (Mistake again) to my traditional. So, with the conversion to Roth, I ended up having in my individual retirement account $18,000 Roth and $6000 Traditional (I have no work contributions) without counting any gain/loss. Also, I never reported my contributions or conversion in the 2020 and 2021 tax returns (again, I was filing my taxes using Turbotax and I did not know that they needed to be reported).

Just recently while I was doing my 2022 taxes using Turbotax I found out that what I was previously doing was wrong and I am in a big mess. I talked to Turbotax agents and a private CPA on what is the best plan to fix all of that, but I got different advice. It is a mess and confusing.

As of now, after I sold all my investment, my Roth balance is $4,568, and my Traditional is $1,931 (big losses).

My plan is to contribute to year 2022 the maximum Roth contribution by April 18th.

I would appreciate it if I can get help from anyone on what is the best solution and what is the roadmap to fix all of that. For example, some of the questions that needed to be answered are:

  • Do I need to file an amendment tax return for 2020 and 2021?
  • Is withdrawing the excess contribution money a better option? And if it is the case, then how much I have to withdraw and from Roth, Traditional, or both?
  • Is recharacterization or transferring the excess toward the 2022 contribution better options?
  • The 6% penalty is to be taken from the final balance or from the initial contributions. Is there a 10% penalty as well? I am confused and I am not sure if the questions above I asked are the right questions. In summary all I need if I can get a clear plan and steps on how to solve all this problem. Your help is definitely greatly appreciated!!
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  • @102008. Thank you for the very helpful comments!! Let's ignore taxes now. Since I have not yet contributed Roth or IRA for 2022 and 2023, and I am eligible to the full amount of $6K (based on my income) I will be applying the excess Roth of 6K of 2020 to the Roth of 2022 (I think I have until April 18th), then the 2021 Roth 6K excess will be applied to the 2023 Roth contribution (I think this one I still have time until April 2024). Are there any issues in my plan above please? Also, I could not write a full comment in this box. Is there a maximum number of characters to respect Commented Apr 10, 2023 at 18:14

2 Answers 2

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talked to Turbotax agents and a private CPA on what is the best plan to fix all of that, but I got different advice

It would help us helping you to know what was that "different advice" that you got.

Do I need to file an amendment tax return for 2020 and 2021?

Depends on what you reported in these tax returns. You've contributed $12K, which is double the maximum, but I suspect that is not what your tax returns say. You'll need to first sort out which contributions need to be backed out, and then figure out how your tax return should look to correctly reflect the situation. You may need to add form 8606 to report the conversion, if you hadn't.

Is withdrawing the excess contribution money a better option? And if it is the case, then how much I have to withdraw and from Roth, Traditional, or both?

Better than what? What other option do you think you have? Paying 6% excise tax every year? Yeah, I'm guessing withdrawing would be better.

You have to limit your contributions to $6K/year, you've contributed double. You already converted the traditional IRA into Roth, so I suggest it would be easier to withdraw the contribution made directly to Roth, not the conversion (it is likely the one you were not allowed to make anyway due to AGI limits - check).

Is recharacterization or transferring the excess toward the 2022 contribution better options?

Yes, according to the IRS Pub 590-A you can do that:

However, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year.

You can deduct excess contributions for previous years that are still in your traditional IRA. The amount you can deduct this year is the lesser of the following two amounts.

  • Your maximum IRA deduction for this year minus any amounts contributed to your traditional IRAs for this year.

  • The total excess contributions in your IRAs at the beginning of this year.

This method lets you avoid making a withdrawal. It doesn’t, however, let you avoid the 6% tax on any excess contributions remaining at the end of a tax year.

Next, you're asking:

The 6% penalty is to be taken from the final balance or from the initial contributions. Is there a 10% penalty as well?

6% penalty is every year until you withdraw, and is based on the contribution, not the balance. You've lost most of your $6K contributed, but the 6% excise tax is calculated based on the original $6K contributed (however that basis is reduced as you apply the excess contribution towards the later years, see the quote from the Pub 590-A above).

The 10% penalty is waived for excess contributions being returned if returned by the extended due date of the original return (usually October 15th). That has passed for your 2020 and 2021 contributions.

Note that the IRA gains are ordinary income, but losses are deducted as investment expense on Schedule A subject to 2% AGI limit, so you may not be able to deduct the losses (which would be deductible if they were in a regular taxable account).

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  • "10% penalty is for early distributions, but this is not your case." I believe you are only exempted from a penalty if you get a return of excess contribution before the due date of the tax return. But the OP has missed the tax return deadline for both 2020 and 2021. Do you have a source that it wouldn't be an early distribution if withdrawn later? Of course, if he is withdrawing Roth IRA contributions, then there wouldn't be a penalty anyway.
    – user102008
    Commented Apr 10, 2023 at 3:24
  • @user102008 you're mistaken. If withdrawn by the due date, the 6% excise tax wouldn't apply. 10% penalty doesn't apply for corrective distributions. See here
    – littleadv
    Commented Apr 10, 2023 at 6:54
  • "corrective distributions" only apply to employer retirement plans, not IRAs
    – user102008
    Commented Apr 10, 2023 at 15:07
  • Ah, you're right, missed that.
    – littleadv
    Commented Apr 10, 2023 at 17:25
  • Could you help with this one please? since I have a 75% loss, my Roth was 18K now the balance is $4,568, and my Traditional was 6K and now the balance is $1,931, then what is the amount to be withdrawn? Originally, I have 12K Roth excess. Commented Apr 12, 2023 at 21:28
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According to Publication 590-A, the contribution limit for Traditional IRA does not depend on the contributions to Roth IRA, but the contribution limit for Roth IRA is reduced by the amount contributed to Traditional IRA. So you had an excess contribution to Roth IRA of $6000 for each of 2020 and 2021.

You need to amend your 2020 taxes to add form 5329 part 4 to report the excess Roth IRA contribution and calculate the 6% penalty on the $6000. You also need to amend your 2021 taxes to add form 5329 part 4 to report the excess Roth IRA contribution and calculate the 6% penalty on the $12000, on both the 2021 excess contribution as well as the previous excess contribution that was not withdrawn in 2021.

I would recommend that you not make any IRA contributions for 2022. That way, $6000 of the previous excess contribution would be absorbed into your 2022 Roth IRA contribution limit. That way, you would only have to pay the 6% penalty for 2022 on the $6000 remaining previous excess contributions. It is too late to withdraw to avoid the penalty for 2022, because you need to withdraw before Dec 31 to avoid the penalty on excess contributions carried over from previous years. If you also do not contribute for 2023, and also have a $6000 Roth IRA contribution limit in 2023, the remaining $6000 excess will be absorbed into your 2023 contribution limit, and you will not have any penalty for 2023. Therefore, I don't see a point to withdrawing it now.

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  • @102008. Thank you for the very helpful comments!! Let's ignore taxes now. Since I have not yet contributed Roth or IRA for 2022 and 2023, and I am eligible to the full amount of $6K (based on my income) I will be applying the excess Roth of 6K of 2020 to the Roth of 2022 (I think I have until April 18th), then the 2021 Roth 6K excess will be applied to the 2023 Roth contribution (I think this one I still have time until April 2024). Are there any issues in my plan above please? Also, I could not write a full comment in this box. Is there a maximum number of characters to respect Commented Apr 11, 2023 at 13:22
  • @RachidBrah: Yes, that is what I am suggesting (absorbing the excess into the contribution limits of 2022 and 2023). Yes, there is a limit of 600 characters in comments.
    – user102008
    Commented Apr 11, 2023 at 21:04
  • Today, I went to one of my broker's offices here in Brooklyn (TD Ameritrade, which is now Schwab), I asked them to carryover and apply my Roth excess of 6K from 2020 and 2021 to my Roth contribution of 2022 and 2023 respectively ( I have not yet contributed to 2022 and 2023 and I am allowed the full amount), but she said it has to be a withdrawal and not a carryover. I insisted a little bit, so she called somebody else and according to her I cannot do it. Could you reaffirm on how sure you were about your way please?....to be continued.... Commented Apr 12, 2023 at 20:22
  • .....Also, since I have a 75% loss (my Roth was 18K now the balance is $4,568, and my Traditional was 6K and now the balance is $1,931 (big losses)), then my withdrawal will be only part of that amount and when I contribute 6k for 2022 and 6k for 2023 I will end up with at least 12k Roth, but if i carryover I will have much less Roth. I really want to have the highest Roth among the 2 options. What do you think about that? Am I missing something here? Thank you! Commented Apr 12, 2023 at 20:30
  • @RachidBrah: You don't need to talk to your broker because this doesn't involve them at all. You are not withdrawing or having them do anything with your IRA. How your excess is calculated is between you and the IRS; your broker doesn't know if you have an excess or how much. Take a look at Form 5329 part 4. Line 19 is your unused contribution limit this year (i.e. your contribution limit minus the amount you contributed this year), so if you didn't contribute, it will be $6000. This is then subtracted from your prior year excess.
    – user102008
    Commented Apr 13, 2023 at 1:56

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