Level 20
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Retirement tax questions

Switching to a traditional IRA doesn't help.  The combined contributions to traditional and Roth IRA accounts is still limited by his $3,000 of compensation.

The excess contribution for 2017 must be removed entirely by a "return of contribution."  It's a return-of-contribution form the he must provide to the custodian; I'm not sure if that is what you meant by a "transfer excess contribution" form.

In 2017 TurboTax, enter the original $5,500 Roth IRA contribution.  In the follow-up when TurboTax indicates that $2,500 is an excess contribution, indicate that the $2,500 will be withdrawn by April 17, 2018.  TurboTax should then prompt you to provide an explanation of the return of contribution.  The amount distributed for a return of contribution must be adjusted by the custodian for any gain or loss while the excess was in the account; the custodian should calculate and apply the adjustment for you.  Any gains distributed will be taxable and subject to early-distribution penalty.

If the original Roth IRA contribution was made in 2017, the return of contribution will be reported on a code JP 2018 Form 1099-R issued next year.  The code JP 2018 Form 1099-R must be reported on his 2017 tax return because code P means taxable in the year prior to the year of the Form 1099-R.  However, since it will be another year of so before this Form 1099-R will be available, to complete his tax return and not have to amend later you'll need to enter this Form 1099-R as if you he has already received it:

  • Box 1 = gross amount distributed, adjusted for gain or loss on the $2,500 contribution being returned
  • Box 2a = any gains included in this distribution
  • Box 7 = codes J and P

Any gains will be subject to tax and a 10% early-distribution penalty.

If the original contribution for 2017 was instead in 2018 (this month), the codes on the 2018 Form 1099-R will be J and 8 and will instead be reportable on his 2018 tax return.