Another Excessive Roth Contribution Question

[SteveKoz]

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 In January 2022 realized we were not eligible to make contributions so had the money withdrawn on 1/15/22.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  Doing an amended 2021 return Turbo asks how much contributed.. 7000;  how much withdrawn 6,578..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

[DanaB27]

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.

[SteveKoz]

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stated that we deposited $14000 into our ROTH IRA's and we withdrew $14000 from our ROTH IRA's when actually the amount withdrawn was less due to the market.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.

[GeorgeM777]

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.

@SteveKoz