Confusion about Form 5329 penalty calculation for excess Roth IRA contribution

I'm struggling with filling out Form 5329 for some excess Roth IRA contributions I made. I had excess contributions for both 2020 and 2021 tax years (but I actually made both contributions during 2021). Now I'm trying to complete a separate Form 5329 for each year, and I'm confused about how to calculate the penalty on the 2020 form. On the 2020 form, lines 24 and 25 say: **24.** Total excess contributions. Add lines 22 and 23 **25.** **Additional tax**. Enter 6% (0.06) of the smaller of line 24 or the value of your Roth IRAs on December 31, 2020 (including 2020 contributions made in 2021) Here's where I'm confused. Since I made my 2020 contribution in 2021 (after December 31, 2020), my Roth IRA balance was literally $0 on December 31, 2020. Does this mean I should enter $0 for line 25 and avoid the 6% penalty completely? Or should I treat it as if the money was already there since the contribution was designated for 2020, even though I physically made it in 2021? Really appreciate any help figuring this out!

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18 comments

Natasha Kuznetsova

•8M

This is actually a good question about how the timing works! The key phrase in the Form 5329 instructions is "including 2020 contributions made in 2021." This means you need to include any 2020 contributions you made during the 2021 calendar year (before the tax filing deadline) when calculating the value of your Roth IRA on December 31, 2020. So even though your Roth IRA physically had $0 on December 31, 2020, for the purpose of calculating this penalty, you need to include the 2020 contribution you made in 2021. The IRS treats these contributions as if they were made on the last day of the tax year they're designated for (December 31, 2020, in your case). Line 25 should be 6% of your excess contribution amount for 2020. You won't escape the penalty just because you made the contribution after December 31.

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Natasha Kuznetsova

•8M

Yes, the IRS uses what's called "constructive receipt" for retirement accounts. For tax purposes, they treat contributions for a specific tax year as if they were made on December 31 of that year, even if you physically made them in the following year before the tax deadline. This concept applies to several tax situations, especially with retirement accounts. For example, if you make traditional IRA contributions for 2024 in early 2025 (before the filing deadline), you can still claim the deduction on your 2024 tax return. The IRS treats it as if you made the contribution in 2024.

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Javier Mendoza

•8M

I had this exact same problem last year with my Roth IRA! I found this awesome tool at https://taxr.ai that analyzed my Roth IRA situation and explained exactly how to handle the excess contribution penalty. I was totally confused by Form 5329 and especially line 25, but the tool walked me through the whole process. They have this document analysis feature that actually reads your forms and tells you what each line means and how to fill it out correctly. It helped me understand that same question about the December 31 value including contributions made the following year. Saved me from making a costly mistake!

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Javier Mendoza

•8M

Yes, the tool can help with already-filed returns! It'll analyze what you did and guide you through the process of filing an amended return if needed. It explains exactly which forms to use and how to correct the excess contribution issue. For the document analysis, you can upload your tax forms, but they use secure encryption and don't store your documents after analysis. You can also just enter the information manually if you're not comfortable uploading. I was hesitant too but found their privacy protections really robust. They explain what specific lines mean rather than just giving generic advice.

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Malik Davis

•8M

I was skeptical about using taxr.ai at first but decided to give it a try with my Roth IRA excess contribution situation. Honestly, it was a lifesaver! The system analyzed my Form 5329 and immediately pointed out that I had been calculating line 25 incorrectly. Like the original poster, I was confused about the December 31 valuation, but the tool explained it perfectly. It even generated a custom report showing exactly how to handle both the current year and previous year excess contributions. The step-by-step instructions made it super clear, and I managed to correct my return before filing. Definitely worth checking out if you're dealing with retirement account issues like this!

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Isabella Santos

•8M

If you're still having trouble figuring this out, you might want to call the IRS directly. I know, I know - everyone says it's impossible to get through. I was in the same boat trying to figure out Form 5329 penalties last year, spent HOURS on hold and eventually gave up. Then I found this service called Claimyr at https://claimyr.com that got me through to an actual IRS agent in under 45 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I explained my excess contribution situation to the agent, and they walked me through exactly how to fill out the form correctly. They confirmed that for line 25, you need to include contributions made in 2021 for 2020 when calculating the December 31 value. Totally worth it rather than guessing and potentially getting it wrong.

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Isabella Santos

•8M

They don't call the IRS for you - it's more like they navigate the phone tree and wait on hold for you, then call you once they've reached a human. You talk directly to the IRS agent yourself. It uses some kind of hold-waiting technology - I don't understand the technical details, but it worked for me. No, it's definitely not a scam. I was super skeptical too! But it actually works because they have a system that efficiently navigates the IRS phone system and holds your place in line. When they reach an agent, you get a call to connect with them. I talked directly to an IRS representative who helped me with my Form 5329 questions after waiting for years trying to get through on my own.

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GalacticGuru

•8M

OK I need to eat crow here. After posting my skeptical comment, I was still stuck with my excess contribution issue and desperate, so I tried Claimyr. I was 100% convinced it wouldn't work but figured what the hell, can't waste more time than I already have on hold. To my shock, I got a call back in about 35 minutes saying they had an IRS agent on the line! The agent confirmed exactly what others here have said - for Form 5329 line 25, you DO include 2020 contributions made in 2021 when calculating the December 31, 2020 value. So you would pay the 6% penalty on your excess amount. The agent also told me I could avoid the penalty by withdrawing the excess plus earnings before filing, which is what I'm doing now. Completely worth it to get a definitive answer straight from the IRS.

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Freya Pedersen

•8M

Something else to consider - if you discover an excess contribution, you can actually remove it (plus any earnings on that excess amount) before your tax filing deadline to avoid the 6% penalty entirely. If you've already filed your 2020 return, you might still be able to fix this by filing an amended return. I made an excess contribution to my Roth last year and was able to call my brokerage and specifically request a "return of excess contribution" for the specific tax year. They calculated the earnings on that amount and distributed both back to me. Had to report the earnings as income for the year I received the distribution, but avoided the 6% penalty.

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Freya Pedersen

•8M

Yes, you would call Vanguard and specifically request a "return of excess contribution" for tax year 2020. Be very clear about which tax year you're correcting. There is a time limit - ideally you want to do this before the tax filing deadline for that year (including extensions). Since we're well past the 2020 deadline, you'll still owe the 6% penalty for 2020, but removing the excess now stops you from owing the penalty for subsequent years too. The excess contribution continues to be penalized 6% every year until you either remove it or "absorb" it by using up part of a future year's contribution limit.

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