Will taking a regular distribution from my Roth IRA in February 2023, correct my 2021 excess contribution? Form 5329 Lines 19 & 20 Help.

Forum|Forum|3 years ago
January 30, 2023
2 replies
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Have a $7000 excess 2021 Roth contribution I just became aware of due to not meeting the MAGI rules in 2021. Since I did not realize my error till now, I contributed $7000 to my Roth again in 2022, however, I am fully qualified to contribute this amount in 2022 tax year.

I will file a 2021 amended return to include a 2021 Form 5329 to claim the excess contribution & pay the 6% tax penalty.

My questions are:

1. I plan to take a $7000 Roth regular distribution in February 2023. Will this now make my 2022 Roth contributions equal $0, as opposed to $7000, even though the regular distribution will take place in 2023 not calendar year 2022? In other words, will this February 2023 distribution make putting $7000 on my 2022 Form 5329 Line 19 correct?

2. If I am allowed to have this February 2023 regular distribution make my Roth IRA contributions for 2022 be $0 as opposed to $7000, this works out to my not paying the 6% excise tax on the excess from 2021 for a second time as it makes 2022 Form 5329 Line 25 equal $0. Is this correct?

3. Form 5329 Line 20 asks for 2022 distributions from my Roth IRA. Do I list my $7000 regular distribution I am making in February 2023? Or do I put $0 & list the $7000 in the 2023 tax filing year after I receive a 1099 R?

4. Does the fact I will need to amend my 2021 tax filing change anything I do or do not do on my 2022 tax filing?

Any help/direction is appreciated.

Not A Product Question

dmertz

Level 15

I won't answer your questions directly because they imply taking the wrong path. In general, you do not want to take a regular distribution in 2023.

To avoid a 6% penalty on your 2022 tax return for the excess contribution carried in from 2021, you must obtain an explicit return of contribution (not a regular distribution) of the $7,000 that you contributed for 2022. Doing so will open up the ability to apply the excess carried in from 2021 as your contribution for 2022, thus avoiding the 6% excess contribution penalty for 2022.

The only reason that you would want to keep the 6% penalty for 2022 and correct the 2021 excess contribution in 2023 is if the $7,000 contribution that you made for 2022 has experienced very large investment gains and the taxes on gains that are required to accompany the returned contribution would exceed the 6%, $420 penalty.

Nothing you do changes the fact that you need to pay the 6% penalty for 2021.

BrightRedAuthor

Level 2

Thank you for your reply.

I am able to receive a return of my 2022 contribution now that it is 2023? Are Roth IRA custodians required and/or able to return contributions once deposited? Is this where if I request a return of contribution prior to the 2022 tax deadline, it will in effect negate my contribution for 2022 and open up sliding the 2021 contribution forward to 2022? Will this generate a 1099 R that I will receive in 2023?

I prefer to apply the excess from 2021 to 2022 but I am confused on how to do this with it already being 2023 & how to input data to Turbo Tax to tell it I have an excess from 2021, I contributed in 2022 but have taken the money out & now want to apply the excess to the 2022.

Thank you for your help.

DanaB27

Level 15

Yes, you can request the with return of the 2022 contribution (this will include earnings or losses calculated by your custodian) until the due date of the 2022 tax return.

You will get a 2023 Form 1099-R in 2024 with codes P and J for the return of contribution and earnings (or losses). This 1099-R will have to be included on your 2022 tax return and you have two options:

You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

Login to your TurboTax Account
Click on the "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”
Answer "Yes" to "Did you get a 1099-R in 2022?"
Select "I'll type it in myself"
Box 1 enter total distribution (contribution plus earning/minus losses)
Box 2a enter the earnings ($0 for a loss)
Box 7 enter J and P
Click "Continue"
On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
Click "Continue" after all 1099-R are entered and answer all the questions.
Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

To apply the 2021 excess to 2022 please follow these steps:

Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
On the "Do you have any Excess Roth Contributions" answer "Yes"
On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).
On the "How Much Excess to 2021?" screen enter how much you want to apply to 2022.

[Edited 01/30/2023 | 3:43 pm PST]

@BrightRed

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BrightRedAuthor

Level 2

If you all could tolerate a follow up question.

I am in the process with the custodian of my Roth IRA account to make a 2022 return of contribution of my allowed contribution. This will make room to apply my 2021 excess to the 2022 return to avoid a penalty for 2022.

My question is:

Since I am requesting return of my allowed (not excess) 2022 contribution (plus earnings/losses) to make room to apply my excess 2021 contribution, should the paper work say it is a return of contribution or a return of excess contribution? Or do custodians code all return of contributions (plus earnings/losses) the same regardless of if it was technically an excess or not?

I want to be sure my procedure to remove these funds is correct so my 1099-R & custodial reportings to the IRS line up with what I am attempting to do so I do not inadvertently cause any future issues for myself.

Thank you again for your help.

@DanaB27 @dmertz

dmertz

Level 15

The tax code provides for a return of any IRA contribution before the due date of your tax return, excess or not. Any return of a Roth IRA contribution is reported with codes J and 8 or J and P depending on when the return of contribution occurs.. Unless you've contributed more than the overall annual limit, a Roth IRA custodian has no way to know if a Roth IRA contribution you made with them is excess or not. It's not their responsibility to know.