Excess contribution to ROTH IRA in 2019 and I received FORM 1099-R: Please help interpretating this

[pghwang0116]

Hello, I am at a loss. I did stupid things last year for 2019 Tax and I am suffering from the consequences.

I hope the experts can help me with this..

In 2019, my wife and I made excess contribution to ROTH IRA and I reported Federal Tax (before 4/15/20, sometime in march 2020). 

After finding this out, we contacted Vanguard and they suggested to make an Traditional IRA account and move some money from ROTH IRA. So we did..

A few days ago, I received two 1099-R forms (one attached to ROTH IRA and the other attached to Traditional IRA). I am pretty sure my wife would be the same, but not entirely sure.

1099-R attached to ROTH IRA shows,

Gross distribution (Box 1): X,XXX. XX

Taxable amount (Box 2a): 0

Federal income tax withheld (Box 4): 0

Distribution code (Box 7): R

State tax withheld (Box 14):0

remaining boxes are empty.

1099-R attached to Traditional IRA shows,

Gross distribution (Box 1): X,XXX.XX  (this amount is about 168 dollars more than box 1 in ROTH IRA 1099-R)

Taxable amount (Box 2a): same amount as above line

Taxable amount not determined, total distribution (Box 2b): these boxes have "X" marked. no amount specified.

Federal income tax withheld (Box 4): 0

Distribution code (Box 7): 02

IRA/SEP/SIMPLE: checked with "X"

State tax withheld (Box 14):0

remaining boxes are empty.

What am I supposed to do? I am totally clueless at this point. Please help.

[AmyC · Accepted solution]

Let's get you straightened out. You know that you put too much money into each IRA. The contribution limit for the year is a ROTH plus Traditional = total allowed. Under age 50 is $6,000, while age 50 and up is $7,000. Income creates phaseouts.

Your ROTH 1099-R has a code R -R—Recharacterized IRA contribution made for 2020 and recharacterized in 2021. Enter the form, no tax consequence, just informational.

Your Traditional IRA - shows a distribution which includes the interest earned on the excess amount. Thus, $168 would be the interest earned. The line 2 is the taxable amount. Enter the form as is. You have a code 2—Early distribution, exception applies (under age 59½). This prevents you from paying a 10% early withdrawal penalty.

[pghwang0116]

AmyC, Thank you!

I really appreciate your time and expertise explaining this to me. If you don't  mind, I would like to ask some more questions...

1. You mentioned there is "NO Penalty." Correct?

2. I DO NOT have to file an Amendment for 2019 Federal Tax. Am I getting this correctly?

3. If I put in the numbers in 2020 tax return in Turbotax, then everything should be fine without any penalty or any sort of letters mentioning unpleasant things.. Right?

4. Do I have to make any withdrawal or any action for $168 on Traditional IRA to avoid any consequences before April 15?

I wonder how I could have survived this without help from Turbotax and experts...

[ErnieS0 · Accepted solution]

@AmyC is correct.

1. There is no early withdrawal penalty on your distribution because it was a “recharacterization,” moving from one type to IRA (Roth) to another (Traditional).
2. You do not have to amend your 2019 tax return because your “recharacterization” took place in 2020 (even though it involved 2019 taxes).
3. The 1099-Rs explain exactly what you did to remove the excess contribution penalty. So the IRS will not send any penalties or letters.
4. You do not have to withdraw the $168 from your Traditional IRA because the money represents earnings from the account, not a contribution. In 2019 your put after tax money into a Roth, but your income was too high for a Roth contribution. As a result, you “recharacterized” your contribution as a non-deductible Traditional IRA contribution (because you made too much for an IRA deduction as well). The $168 is never taxed earnings so it is taxable on your 2020 return. Someday when you withdraw money from the Traditional IRA you will have a mix of never taxed earnings and previously taxed money so part of the distribution will be non-taxable. TurboTax will track your IRA “basis”.  

[pghwang0116]

Thank you so much for clarification, ErnieS0!