@silver6054 wrote:
My daughter contributed to a ROTH IRA in Dec 2020 when it turns out she was ineligible. She has removed the contribution and earnings in Feb 2021. The advice earlier in this thread is to use codes P & J on the 1099-R and then enter the year as 2021 for the 1099-R to make the earnings/penalty taxable in 2020.
Originally I used code 8 and J instead, which seems to automatically apply to 2020. Is there a problem doing that?
Also, can I just enter it as a 1099-R or do I have to mark it as a substitute. Doing that seems to create the need to contact the IRS so they can nag Fidelity, and write explanations on the substitute form
Yes there is a problem doing that because the form you will receive will NOT have a code 8 and only a code PJ allows you to enter an explanation that is required if you do not actually have the 1099-R in hand.
It is NOT a substitute 1099-R because you do not have an actual 1099-R that is incorrect that the issuer refused to correct. Substitute 1099-R's are to fix a defective form that the insurer will not fix.
here is the procedure and it is the only proper way to do it.
======================================
*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2020 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:
You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld.
The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2021.
You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),
The earnings in box 2a,
Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "
Enter code "J" in box 7 (Bottom).
On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019
After the 1099-R summary screen press continue.
If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.
Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.
The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
