Retirement tax questions

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@SteveK123 wrote:

@macuser_22 

Hi, I need some help as well on this. This is my situation.

 

1. Overcontributed in 2019 by $9,444 ($4,722 or me and $4,722 for my wife).

2. Overcontributed in 2020 by $12,000 ($6,000 for me and $6,000 for my wife).

3. Amended 2019 and 2020 returns with the 1040-X and 5329 forms and paid the 6% penalty for both years ($566 for 2019 and $1,286 for 2020)

4. Withdrew the excess $10,722.00 from both of our Roth IRA's in December 2021 ($21,444.00 total between the two IRA's).

5. We both received 1099-R forms for 2021 from Fidelity. Only boxes filled out is box 1 for $10,722.00 and box 7 with code J.

 

When I went to import these into TurboTax it dramatically lowered the refund I was due. My understanding is if you take the money out, you only pay the 6% penalty and not any early withdrawal when you remove the excess contribution from the IRA's. So my understanding is the IRA withdrawal in 2021 should have no impact on my 2021 taxes. Any help on how I should enter these 1099-R's would be greatly appreciated.

 

Thanks!

Steve

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You should have each received a 1099-R with a code J with $10,722 in box 1.   When entering those you indicate that it was your own prior contributions that you were removing.   No earnings should have been withdrawn since you paid the 6% penalty.  Code J is the proper code since you missed the time limit to have a return of contribution plus earnings so a normal distribution was required.

You can always withdraw your own Roth contributions tax and penalty free.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

One of the followup questions will ask for your prior year** contributions not previously withdrawn. Those contributions that still remain in the Roth will not be taxed or subject to a early withdrawal penalty. That will add a 8606 form to your tax return with the Roth contribution and tax calculation in part III.

Note: **Prior year - any current year Roth contributions should be entered into the IRA contributions section. They will not show up in the prior years contributions but will be accounted for on the 8606 form that calculates the taxable amount.