Get your taxes done using TurboTax

Yes, you won't have to pay the 6% penalty because you removed the full excess contribution for 2022 by the due date of the 2022 tax return. You won't need Form 5329 part IV for the penalty.

If you removed the full $7,000 excess Roth contribution then you don't have to enter the contribution in the IRA contribution interview. Another option is to enter the $7,000 Roth contribution and then enter that you removed the excess contribution amount ($7,000 disregard the loss here) by the due date on the penalty screen at the end of the IRA contribution interview.

Yes, only earnings would be taxable in 2022 but won't be subject to the 10% early withdrawal penalty if removed after December 29th, 2022 (Form 5329 part I is used for the exemption). But you had a loss so you won't have a taxable event. Therefore, you won't need Form 5329 part I. All that TurboTax will do is add an explanation statement where you can enter that you withdrew the $7,000 excess contribution with a $$$$ loss.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 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 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution minus loss)
7. Box 2a enter $0
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 2023 Form 1099-R.

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.