The IRS would receive notification of the IRA excess contributions through its receipt of the Form 5498 from the bank or financial institution where the IRA or IRAs were established.
Tax software will generally track Roth contributions, even though they do not show up anywhere on the tax return. The IRA custodian issues a Form 5498 each year that will show the amount of contributions made for the year. Roth IRA statements will show contributions received for the year.
The IRS has all these forms, but good chance they are not tracked by the IRS in any orderly fashion. Another source of Roth basis is conversions, which would be reported on any prior tax return, also on Form 8606.
Form 5498: IRA Contributions Information reports your IRA contributions to the IRS. Your IRA trustee or issuer - not you - is required to file this form with the IRS by May 31.
Be aware you'll have to pay a 6% penalty each year until the excess is absorbed or corrected. Note: If you contributed to a Roth and traditional IRA in the same tax year and your total contribution went over the allowable IRA amount, IRS regulations require you to remove the excess from the Roth IRA first.
You will need to file an amended return within six months of the original return due date (generally by October 15). Write “Filed pursuant to section 301.9100-2” at the top of Form 1040X. If the excess generated any earnings, you'll need to remove them and include them on your gross income.
However, Roth conversions not held five years are subject to the 10% early distribution penalty if withdrawn before age 59 ½. Ultimately, like the tax return itself, it is the client's (the taxpayer's) responsibility to keep track of IRA basis.
Roth IRA Income Limits
MAGI is calculated by taking the adjusted gross income (AGI) from your tax return and adding back deductions for things like student loan interest, self-employment taxes, and higher education expenses.
Contributions to a Roth IRA aren't deductible (and you don't report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren't subject to tax. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it's set up.
A backdoor Roth IRA is not an official type of individual retirement account. Instead, it is an informal name for a complicated method used by high-income taxpayers to create a permanently tax-free Roth IRA, even if their incomes exceed the limits that the tax law prescribes for regular Roth ownership.
In 2019 an individual with income below $122,000 can invest the maximum $6,000 in a Roth IRA. (If you are at least 50, the limit is $7,000.) If your income is between $122,000 and $137,000 you can still make a limited contribution.
There's no law that says you have to keep track of your Roth IRA contributions. Not keeping records, though, can come back and bite you. You can take your basis -- your original contributions -- out of the account at any time, with no penalty as you've already paid tax on them.
Failure to file Form 8606 for a distribution could result in the IRA owner (or beneficiary) paying income tax and the additional 10 percent early distribution penalty tax on amounts that should be tax-free. Example: Katlyn made a nondeductible contribution to her traditional IRA for tax year 2017.
Your IRA and Taxes
You must track the basis of your Roth IRA. If you fail to do so, the IRS may actually tax you twice on the amount in the IRA. You need to complete an IRS Form 8606 to cover your contributions, income, and the basis in your IRA.
The information on Form 5498 is submitted to the IRS by the trustee or issuer of your individual retirement arrangement (IRA) to report contributions, including any catch-up contributions, required minimum distributions (RMDs), and the fair market value (FMV) of the account.
No, Roth IRA contributions do not count toward your 401(k) limit. However, Roth IRA contributions do count toward your total IRA limit. So, if you contribute to both a Roth and a traditional IRA, then the combined amount can't exceed the annual contribution limit.
The Bottom Line
As long as you meet eligibility requirements, such as having earned income, you can contribute to both a Roth and a traditional IRA. How much you contribute to each is up to you, as long as you don't exceed the combined annual contribution limit of $6,000, or $7,000 if you're age 50 or older.
High earners are prohibited from making Roth IRA contributions. Contributions are also off-limits if you're filing single or head of household with an annual income of $144,000 or more in 2022, up from a $140,000 limit in 2021.
Backdoor and mega backdoor Roth
In a backdoor Roth, investors make a non-deductible contribution to a traditional IRA and then quickly convert to a Roth IRA. Once the money is in a Roth IRA, it's tax-free when taken out (if you meet the holding period and age requirements).
You can have more than one Roth IRA, and you can open more than one Roth IRA at any time. There is no limit to the number of Roth IRA accounts you can have. However, no matter how many Roth IRAs you have, your total contributions cannot exceed the limits set by the government.
The backdoor Roth IRA strategy is still currently viable, but that may change at any time in 2022. Under the provisions of the Build Back Better bill, which passed the House of Representatives in 2021, high-income taxpayers would be prevented from making Roth conversions.
Retirement accounts, including Traditional, Roth and SEP IRAs, will receive a Form 1099-R only if a distribution (withdrawal) was made during the year. If you made contributions (deposits) to your IRA account for the tax year, you will receive a Form 5498 detailing those contributions in May.
You don't have to report your contribution to a Roth IRA; however, you may want to input it into TurboTax so you can track your basis. In order to avoid paying taxes on the earnings, it's necessary to leave your contributions in your Roth IRA for at least five years.
Yes, you it is best to enter Roth contributions into TurboTax to have a record of your contributions, to check that your Modified Gross Income did not limit how much you can contribute and you might qualify for the Retirement Savers Credit.