Retirement tax questions

TurboTax will give the warning when your modified adjusted gross income (MAGI)  is over the limit. Please see the limits below:

• 2019 - Amount of Roth IRA Contributions You Can Make for 2019 page 42
• 2020 - Amount of Roth IRA Contributions You Can Make for 2020

Please see Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes how the MAGI is calculated.

If you contributed to a Roth IRA but your MAGI creates an excess contribution, then you have the following options for your 2020 excess contribution:

Option 1

Request with your Financial Institution a recharacterization of the Roth contribution as a traditional IRA contribution before the due date of the return.

To report this recharacterization you will enter the following steps into TurboTax:

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. 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.

Tip: Choose to make this contribution nondeductible if it isn’t already nondeductible because of your income limit and a work retirement plan.  Then you can convert the nondeductible part (basis) tax-free to a Roth IRA (backdoor Roth).

Option 2

Request with your Financial Institution the withdrawal of excess contribution plus earnings by the due date of the return. The earnings will be included in the taxable income for the year in which the excess contribution was made. Please keep in mind that this will increase your MAGI again. Therefore, you might have to withdraw some extra excess contribution to not be caught in a loop.

 If you are under 59 ½ then you will have an 10% early withdrawal penalty on the earnings.

If you withdrew a 2020 excess contribution plus earnings in 2021 before the due date, then you will get a 1099-R 2021 in 2022 with codes P and J. 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.