Retirement tax questions

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@PandR2020 wrote:

Dave,

 

There seems to be a lot of conflicting answers concerning the tax treatment of the withdrawal of excess contributions and earnings to a Roth IRA. Some people are saying that you need to create a "dummy" 1099-R to use when filing your 2019 return because the earnings are taxable in 2019, and if you wait until you receive your 1099-R in 2021 then you will have to amend your 2019 return. However, you say this is not the case. Instead you say the withdrawn earnings are taxable in the year they are withdrawn. Therefore, you should wait for the actual 1099-R in 2021, and you will not have to amend your 2019 return. Do you have IRS documents or other documents that explain this or make it more clear?

 

A lot of the discussion seems to be around the code used in Box 7. Looking at https://www.irs.gov/pub/irs-pdf/f1099r.pdf it says that if code 8 is selected then it would be taxable in the current tax year, but if code P is selected then it would be taxable in the prior tax year. So if code P is selected then wouldn't an amendment be required for the prior tax year?

 

Looking at the 1099-R that will be sent out in 2021 it reads:

8—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2020.

P—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2019.

 

Thanks

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*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2019 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 2020 1099-R into the 2020 tax return since the withholding is reported in the year that the tax was withheld. The 2020 code JP will not do anything in 2020 but the withholding will be applied to 2020.

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 2018 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2020 1099-R. - That makes it taxable in 2019 and not 2018

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 2020 1099-R on your 2019 tax return to avoid having to amend in 2020.

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.