Hello AmendedQuestioner,
Great question about the excess ROTH IRA contribution which occurs frequently. Here is some background regarding excess contributions options:
Retirement can be a complex area of your tax return. There are several options available for correcting excess contributions. However, not every option is applicable to each situation. Therefore, we recommend you consult with your financial advisor before taking any of the steps below to determine which option is the most appropriate for your specific situation.
The options available include:
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Pay the penalty for an excess contribution. You'll need to pay a 6% penalty each year that the excess remains in your Roth plan. If a Roth IRA contribution is allowed next year (or any future year), excess contributions can be applied up to the contribution limit for that year and no longer subject to the penalty.
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Withdraw the excess (including any money you earned on it) before the filing deadline for your tax return. If you do this, you'll need to correct the amount you entered in TurboTax as your contribution.
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Recharacterize your Roth IRA contribution to be a traditional IRA contribution. That means that you instruct the account trustee to move the money to a traditional IRA and treat it as if that's where you made the original contribution.
To answer your specific questions:
#1 Yes amend your 2022 return before October 16th, 2023 to indicate the excess 2022 ROTH IRA was removed and report the earnings in the amended 2022 return. The earnings would be the excess of cash returned over the excess contribution amount.
#2 For 2023 you will only need to report the earnings for the 2023 contribution returned to you. Your broker may issue a 1099R for the distribution for the entire amount but only earnings portion will be taxable. Special codes will be used and entered into Turbo Tax to determine the taxable amounts. A “J” with code “P” or “8” for a Roth IRA excess contribution, and does not mark the IRA/SEP/SIMPLE box.
I hope this helps with clearing up this issue.
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