Excess Roth Ira contribution

[ir63]

I am single, 28 years old. During 2021 I made $6000 contribution to my Fidelity Roth Ira account. When I prepared my taxes with TurboTax Premier, I got a suggestion to contribute $3000 to Ira account to reduce my taxes. I made $3000 contribution to my Charles Schwab account. I thought that the limit of $6000 applies to both, Roth Ira and Ira for a total of $12000. It looks like I was wrong. I already submitted my return. Is it true that I can contact my Fidelity and ask them to apply $3000 from 2021 to 2022 year and leave my 2021 tax return without changes? Is it any penalty? 

[DanaB27]

Yes, you can apply the contribution to 2022 in your 2022 tax return but then you will have to pay the 6% penalty.

Or you can request a return of excess contribution plus earnings  before the due date and then avoid the 6% excess contribution penalty.

If you do this you will have to amend your 2021 return to remove the penalty. But the earnings of the excess contribution are taxable in 2021 and will be subject to the 10% early withdrawal penalty since you are under 59 1/2.

You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return and also fix the 6% penalty then or
• amend your 2021 return now and create Form 1099-R for the excess contribution plus earnings and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount under "Another reason" if you are over 59 1/2 (if you under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

[ir63]

What if I apply $3000 out of $6000 I contributed in 2021 to 2022? Can I do it?

[DanaB27]

If you request with your financial institution to apply part of the 2021 contribution to 2022 usually you will get a Form 1099-R because they handle it as a distribution and the new contribution. 

To be sure that the financial institute codes Form 1099-R correctly I would request a return of excess contribution plus earnings and then make a new contribution for 2022. 

@ir63

[ir63]

What about carry forward? Can I offset the excess contribution by limiting my annual contribution for the 2022 to the maximum minus the excess. So, instead of maximum $6000 for 2022 I will contribute only $3000?

[DanaB27 · Accepted solution]

Yes, you can contribute less in 2022 ($3,000) and apply the excess on your 2022 tax return to 2022. If you do this you still will have to pay the 6% excess contribution penalty on your 2021 tax return.

On your 2022 tax return, you will follow these steps:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. On the "Do you have any Excess Roth Contributions" answer "Yes"
8. On the "Enter Excess Contributions" screen enter the total excess contribution if it isn’t carried over automatically.
9. On the next screen you select have much you want to apply to 2022.

@ir63

[Yellowstone-newbie]

I used the recommended navigation path, but steps 7, 8 and 9 are different. I am using Home & Business version. 
It asked: Contribution Before Due date for your return. Entered amount. 
But it really is missing step 8 and 9

Please help!

much appreciated!

[DanaB27]

Please be aware, if you cannot make contributions for 2021 then the screen to apply the excess to 2021 won't come up.

If you are allowed to make contributions for 2021, did you say "yes" to "Do you have any Excess Roth Contributions"? If you do not get the follow-up questions then you might have to delete the contribution entries and reenter them:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Deselect “Roth IRA” and confirm the deletion.

Or in Form mode select "Delete Form" when you have the "IRA Contribution Worksheet" open.

@Yellowstone-newbie