2021 excess Roth contribution. 5239 and penalty necessary on 2021 return?

[jfoxcpacfp]

jfoxcpacfp - yes, it does sound funny to worry about rectifying $3 income, but regardless I am still curious if the steps outlined are the correct way to amend the 2018 federal income tax form? I admit it …. I’m a rule follower …

Someone else will have to answer that one, just not taking the time. As you may be aware, the IRS doesn’t require you to report interest < $10, same concept.

You might try working it out on a 2018 return with pencil and paper. Chances are, your bottom line will not change, but those exercises are usually beneficial simply to track the math through the system.

[LJK]

jfoxcpacfp - yes, it does sound funny to worry about rectifying $3 income, but regardless I am still curious if the steps outlined are the correct way to amend the 2018 federal income tax form? I admit it …. I’m a rule follower …

[jfoxcpacfp]

Along the same topic, here’s my situation with removal of excess Roth contribution and earnings in 2018 but didn’t capture this removal correctly in my 2018 tax return as earnings were not included in my 2018 taxable income. I’m trying to determine steps necessary to amend 2018 tax return correctly.

Specifically, in 2018 I made a $4000 Roth contribution. In April 2019 when doing my taxes, my MAGI for 2018 was too high to make a $4000 contribution to my Roth IRA. I could make $3960 Roth contribution. I had $42,67 ($40 excess contribution + $2.67 earnings) removed from the Roth IRA by April 15, 2019. They were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me. I just realized this tax year that I did not reflect this removal of excess funds and earnings currently from my 2018 tax return. I am also younger than 59 1/2 years old.

In my 2018 tax return, I incorrectly added a Explanation Statement that said I recharacterized my excess contribution. At the time I input my 2018 tax return, I thought I had recharacterized excess into traditional IRA; but that is not what happened.

After recently checking, I found that the excess funds and earnings were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me.

What are the specific steps and forms that need to be executed to correct my 2018 tax return?

This is what I think needs to be done but could you confirm/refute these steps?
1) file an amended 2018 tax return. On amended 1040, add $2.67 to line 4a and $2.67 to line 4b.
2) Revise Explanation Statement to say how funds were allocated after being removed.
3) complete 5329, line 1 since I’m under 59 1/2 and will have to pay 10% penalty on earnings that were withdrawn? Is there any other information on 5329 form that needs to be filled in? I don’t think Par IV applies as I had my excess $40 contribution removed.

Is this the process?

No way would I file an amended return for $3 of income or would I expect anyone (human or computer) at the IRS to care. If you filed timely in 2018, the SOL is about to end, anyway. I realize this is your first post (and welcome!) but even I don’t care. This has been a good thought exercise, I’m sure, but recommend you just move on.

[jfoxcpacfp]

This happens a lot. In this situation, you can have your custodian recharacterize to a TIRA. Since you have taken the $$ out, just contribute to a TIRA by 4/18 and convert to a Roth (“back door”). You’ll owe tax on the growth, no penalty.

Actually need a bit of clarification here. You stated you “reversed” your contribution, which I took to mean the custodian “erased” as if it had never happened. If this is true, the original advice stands. However, if you simply took a distribution of the original contribution, you can not contribute to a TIRA for the same year. Given that you are now referring to a “withdrawal”, that leads me to believe the custodian did not “reverse” it and, instead, withdrew the $$ from your Roth, which would be treated as a distribution.

The distribution, if that is what is is, will be reported in tax year 2022, not 2021. The 1099R for 2022 should include the growth in the account, also, which w/b taxable in 2022.

[LJK]

Along the same topic, here’s my situation with removal of excess Roth contribution and earnings in 2018 but didn’t capture this removal correctly in my 2018 tax return as earnings were not included in my 2018 taxable income. I’m trying to determine steps necessary to amend 2018 tax return correctly.

Specifically, in 2018 I made a $4000 Roth contribution. In April 2019 when doing my taxes, my MAGI for 2018 was too high to make a $4000 contribution to my Roth IRA. I could make $3960 Roth contribution. I had $42,67 ($40 excess contribution + $2.67 earnings) removed from the Roth IRA by April 15, 2019. They were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me. I just realized this tax year that I did not reflect this removal of excess funds and earnings currently from my 2018 tax return. I am also younger than 59 1/2 years old.

In my 2018 tax return, I incorrectly added a Explanation Statement that said I recharacterized my excess contribution. At the time I input my 2018 tax return, I thought I had recharacterized excess into traditional IRA; but that is not what happened.

After recently checking, I found that the excess funds and earnings were reallocated as follows on April 15, 2019: $40 of the returned $42.67 was used to make a $40 Roth 2019 contribution and $2.67 was returned to me.

What are the specific steps and forms that need to be executed to correct my 2018 tax return?

This is what I think needs to be done but could you confirm/refute these steps?
1) file an amended 2018 tax return. On amended 1040, add $2.67 to line 4a and $2.67 to line 4b.
2) Revise Explanation Statement to say how funds were allocated after being removed.
3) complete 5329, line 1 since I’m under 59 1/2 and will have to pay 10% penalty on earnings that were withdrawn? Is there any other information on 5329 form that needs to be filled in? I don’t think Par IV applies as I had my excess $40 contribution removed.

Is this the process?

[Bmac]

@jfoxcoacfp, thank you . Regarding the actual 2021 reporting, after further reading of instructions for forms 8606 and 5329 I believe I report the total withdrawal on 1040 line 4a, and the gains on 4b with a statement, form 8606 is NOT reported and I will put just the gains on line 1 of the 5329 for the 10% penalty but not complete part III this year. In 2022 I should receive the 1099-R with distribution code P which will indicate taxes already paid in year received (2021). Can you or spiritrider confirm my understanding?

[jfoxcpacfp]

This happens a lot. In this situation, you can have your custodian recharacterize to a TIRA. Since you have taken the $$ out, just contribute to a TIRA by 4/18 and convert to a Roth (“back door”). You’ll owe tax on the growth, no penalty.

[Bmac]

For the tax mavens or professionals on this forum, in 2021 I contributed $6000 to my Roth, but it turns out my income was too high for Roth contributions. I have had Vanguard withdraw the $6000 as well as the gains. I have not yet filed my 2021 tax return. I am a bit confused as to whether or not I am required to file form 5239 and pay a penalty on the gains. Since I have reversed the contribution and gains before the due date of the return and before filing, I believe I need to file form 8606 and include the gains, but not contribution, in my 2021 taxable income. But since I have removed the contribution and gains already, do I also need to file 5239 and pay the penalty on these gains with my 2021 return? I anticipate that in 2022 I will receive a 1099-R for the withdrawal transaction. But my research suggests that in this scenario no penalty is required.