Question: Erek made contributions to his Roth IRA in 2020, 2021 and 2022. He later found out his modified AGI was over the limit, so he was not eligible to make the contributions. He withdrew all of them in 2023. How should he report this? Does he need to go back and amend to pay the §4963 6% excise tax?
Answer: For a closed year, like 2020, if Erek had no other changes on his original tax return, he could file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, independently and pay the 6% penalty by using the prior year’s version of the form. No amended return is needed. For 2021 and 2022, which are open years, he could either amend each year to include the prior year’s Form 5329 along with the Form 1040-X, Amended U.S. Individual Income Tax Return, or file it independently to pay the penalty.
To fix it, if Erek withdraws the excess contribution before the income tax return due date, including extensions, he must withdraw the excess contribution plus earnings. Earnings are required to be included in gross income. However, no 6% excise tax applies. Note that earnings from the excess contribution are included in income in the year in which the contribution was made, not in the year when the earnings were withdrawn. However, if he takes out the excess after the due date, he is not required to withdraw the earnings and the 6% excise tax would apply on the excess contribution, excluding the earnings. The penalty will be imposed for each year the excess contribution remains in the IRA until it is removed from the account.
Due to the enactment of the SECURE 2.0 Act of 2022, Erek is exempt from paying the 10% early distribution penalty on the related earnings. However, he is still required to report the earnings as income for the year he makes the distribution or, if withdrawal occurs before the due date, he will report the earnings in the year the excess contribution was made.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.