Retirement tax questions

Yes, you would select option a) since you would only pay income tax and the 10% early withdrawal penalty (if you are under 59 1/2) on the earnings. 

Yes, Form 5329 will calculate the 10% penalty if you are under 59 1/2 on your 2020 tax return.

You will get a 1099-R 2021 in 2022 with codes P and J for the withdrawal of excess contribution plus earnings. This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 1099-R  2021 in 2022 and amend your 2020 return or
• You can report it now in your 2020 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 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2020?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and J 
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

Please be aware that if your Roth contribution was limited because of you modified adjusted gross income (MAGI) then you have the option to recharacterize the contribution as a traditional IRA contribution instead of withdrawing the excess contribution plus earnings. 

If you choose to do this request the recharacterization with your financial institute and follow these steps: 

1. Open your return 
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. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible and you only get a screen saying $0 is deductible)