In 2021 made a 7,000 contribution. In January 2022 realized we were not eligible to make contributions so had the money withdrawn on 1/15/22. Fidelity sent me 6,578 due to loss. Doing an amended 2021 return Turbo asks how much contributed.. 7000; how much withdrawn 6,578.. Showing I have a tax due? If I say I withdrew 7,000 then no tax due. How should I handle this? How would the IRS or TT know I took a loss? It just looks like I didn't withdraw all that was deposited. Fidelity sent in a 1099-R showing 6,578 so there would be a mismatch if I just enter 7,000. Will I also continue to be penalized for not taking out the additional $422 ? Please help me figure this out. Thanks
No, you won't be penalized. On your 2021 return on the penalty screen during the IRA contribution interview you will enter $7,000 (ignore any losses or earnings). This will remove the 6% excess contribution penalty from your 2021 return.
Your 2022 Form 1099-R should have codes P and J in box 7 for the withdrawal of excess contribution plus earnings (but you had a loss). This has to be entered on your 2021 return. Only earnings would be taxable and subject to the 10% early withdrawal penalty (if under 59 1/2).
After you enter the 2022 Form 1099-R on your 2021 return there will be follow-up questions indicating this was a 2022 Form 1099-R and explaining the return of contribution. Here you can enter that you had the $7,000 excess contribution returned to you with a $422 loss.
Do I need to file an amended 2021 return. This is what I did. When filing my 2021 taxes I stated that we deposited $14000 into our ROTH IRA's and we withdrew $14000 from our ROTH IRA's when actually the amount withdrawn was less due to the market. I didn't understand how all this works and couldn't understand why I would have to pay any penalty if I filed the actual amount returned. In 2022 we got the 1099-R for the 2021 withdrawal and during our 2022 Turbo tax it stated we might have to file an amended 2021return. I believe the amended return would show a refund of the $60 penalty we SHOULD have paid but when I amended my actual 2021 return it showed $0 Refund and $0 Owed since we never paid the penalty. Turbo tax popped up a message that it doesn't see any change in my return and am I sure I need to file it. Not sure what we should do. Please advise.
No, it does not appear that you need to amend your 2021 return because you reported the Roth over-contribution before the due date for your 2021 return. Moreover, it appears that you reported the over-contribution correctly and properly accounted for the fact that you had a small loss in connection with the over-contribution. As long as all of this was reported timely, that is before the due date for your 2021 return, then you can ignore the 1099-R that you received in early 2022.