Retirement tax questions

Remove the Roth IRA contribution plus earnings before the due date for your tax return which is April 18, 2022 for the 2021 tax return. The earnings will be taxable in 2021 and you will receive a Form 1099-R for 2022.

Withdraw the excess contribution and earnings: In general, you can avoid the 6% penalty if you withdraw the extra contribution and any earnings before your tax deadline. You must declare the earnings as income on your taxes. Also, you may owe a 10% tax for early withdrawal on the earnings if you're younger than 59½.

It's quite likely you will receive a Form 1099-R in 2022 if you actually removed the excess in 2022 before filing your 2021 tax return. You must report those earnings in 2021 (with or without a Form 1099-R). Use code 8, in Box 7. Create a Form 1099-R in your 2021 return.

• 8 – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2021

Next year, when you receive the Form 1099-R for this same distribution, there should be a code P, which will show that the distribution was already included and taxed in your 2021 tax return. The result should be nothing taxable in 2022.

• P – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2021 (it will be changed from 2020 to 2021 for 2022 tax year

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).

Wages, salaries, etc.

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

Commissions.

An amount you receive that is a percentage of profits or sales price is compensation.

Self-employment income.

If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and

• The deduction allowed for the deductible part of your self-employment taxes.

Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs.  All of this information can be reviewed in IRS Publication 590a.  See the image below.