Someone recommended you as an expert on this subject, so here goes. And this is same problem other people have had and TurboTax doesn't handle well.
My husband worked a half year in 2020 and then retired, so we didn't have this problem in 2020. He did not work at all in 2021 and I am retired as well. We had only retirement income, but no earned income in 2021. So, we didn't catch the problem until trying to do taxes for 2021 in early 2022.
He made contributions to his Roth IRA in 2021 which is against the rules. As soon as we realized the mistake in Feb 2022, we removed the contributions and the earnings associated with the earnings. We got a letter from the financial institution stating the amount of contribution returned and earnings returned. The 1099-R will come for this transaction in 2023 or 2022.
How do you report the return of excess contribution and earnings on the 2021 return? TurboTax won't let you just write it in on 1040 line 4a and 4b. You need to make a 1099-R or substitute 1099-R in order to get the info to go into the right spot on the return. Is this legal? I want to report it this year because the earnings are earnings for 2021. When I made up a substitute 1099-R, the only code for box 7 that would work was code 8. Code J is for an early withdrawal of Roth IRA funds. We are over age 60, so this is not an early withdrawal. It's some sort of corrective withdrawal. Code P would refer to the previous year of 2020, and that is not our situation. I also had to check the box for IRA/SEP/Simple which is really for a regular IRA. If I didn't check this box, TurboTax put the earnings in the wages section of income. This is not right.
We don't have an accountant since we use TT and it's been great up until this problem. I tried calling 2 different accountants and the IRS. Mostly you have to pay for them to do your taxes. One accountant and the lady at the IRS said don't make a 1099-R. But that seems to be the only way to do it. The substitute 1099-R creates a form 4852 which gets e-filed with your tax return.
The amount of taxes we have to pay on these earnings is very small -- $18. It seems better to do it now than to have penalties put on it later. How do you do it?
