Excess Roth IRA contribution made in 2017 and withdrawn before filing in 2018. When and how do I pay taxes on any earnings?

[starbase1999]

I notice that when I look at the tax return that will be filed, the 1099-R is not present.  All the codes I enter are informational since they're not filed.  The only information about the excess contribution withdrawal that I made is 1040 line 15a, 15b, 5329 and the Additional Information for the 2017 Return section.  

5329, line 2 containing the code 12 and the explanation of the withdrawal in the Additional Information section seem to be the key to all this.  Entering P & J on the 1099-R is kind of like my creating and generating the form for my records as supporting documents.  For some reason, I thought that 1099-R would be filed with the return as well.

[macuser_22]

That is all there is.  There is no actual 1099-R form.  The screen is a data entry screen - not a real form.

[taxrookie]

Hi guys, I am in similar situation except I am under 59 1/2 years old.  When filing out this mock 1099-R data entry section, do I still need to enter on "Deductions and Credits" the original contributions made and contributions withdrawn before due date?  OR should I treat this section as "None of the Above" for having made a contribution for Roth IRA since I am filling out this mock 1099-R form for box 1, box 2a, and codes J and P?

[macuser_22]

You want to uncheck all boxes above the none of the above and "continue" to remove the contribution from the tax return since it was returned.  You do not want anything about the contribution (that was not made) to go on the tax return other than any tax on the earnings that were returned with the contribution (reported in box 2a on the 1099-R) and the explanation statement.

[taxrookie]

Thanks macuser_22, First question: how about 1040 line 15a (IRA distributions) and 15b (Taxable amount) under Income section?  I have read conflicting Q&A's that excess contributions withdrawn should be reported here, with the total (contribution + earnings) for 15a and any earnings on the excess contribution on 15b?

second question: When TurboTax is asking me to "Enter any contribution that you withdrew before April 17th 2018" ... I should leave that blank because I will be reporting this situation on the mock-1099R?
(I was not eligible to contribute at all due to MAGI but i contributed full amount of $5,500 during 2017)

[macuser_22]

1) On a return of contribution, any earnings would be reported in box 2a that would be the taxable amount reported on line 15b.

2) If you mean in the IRA contribution interview, you enter the amount that was withdrawn. If you withdrew the entire contribution then  enter that amount.  That would be the amount entered into box 1 on the 1099-R minus the box 2a earnings.

[taxrookie]

followup:  1099-R box 1 is labeled Gross Distribution, do I just put my contribution amount here or the contribution plus earnings?
I understand it as: box 1 (excess contribution + earnings) and then 2a (earnings on excess contribution only).  Box 2b check boxes, leave blank?

[macuser_22]

Like I said, the amount returned is the box 1 minus the box 2a amount.  Box 2b does not get checked.

[dpreas2017]

Based on my first pass through TT, where I figured out I had an excessive Roth IRA contribution, I withdrew the amount reported as excess by TT from my Roth IRA (including earning on that amount).  So now I'm stuck in the "endless loop" discussed earlier in this thread.  It seems that the recommended way of dealing with this is to "estimate" your excess beyond what is reported by TT and withdraw that amount (plus earnings) thus preventing the "endless loop".

So I called by brokerage firm to chat about it. The retirement specialist had to consult with his peers and review the tax law.  His response to was was that his firm used to get that question "all the time".  But he said they haven't been questioned about this issue in years and it was their understanding that the tax law was modified to prevent the "endless loop" scenario.  He also conceded that 15b goes toward you MAGI.  

So I pulled out another $300 from my Roth and I'm hoping for the best.  Why doesn't TT instruct it's user to remove an additional amount then the initially report excess to prevent the "endless loop"?  Since most of us are using TT in lieu of a CPA, I mean, are we just supposed to know to do this?

[dmertz]

Nothing has changed in the tax law with regard to obtaining a return of excess contribution.  The iterative (not "endless," it always eventually converges) calculation when your Roth IRA has experienced investment gains and your MAGI falls in the phase out range for a Roth IRA contribution exists as it always has.  Most people don't encounter the iterative calculation because most people probably don't fall in the phase-out range.

When there are gains, TurboTax can't calculate that actual amount that must be returned since you and TurboTax have no way of knowing the actual gains until you've already received the return-of-contribution distribution.  Rather than deal with the iterative calculation, I suspect that many people obtain a return of contribution of the initially indicated amount, pay the 6% penalty on the small amount of additional excess that results from the gain added to income, then wait until the following year to either apply that excess as a subsequent-year contribution or simply make a regular distribution equal to the amount of the excess, eliminating the excess.

[brian-b-clarke]

My mind is blown.  I wish I had found this thread a year ago so I didn't head into this endless loop!  I think I now know how to handle my amended 2017 return thanks to this thread.  So big thanks to the contributors here!

If any of the rock stars are still monitoring this thread, I would love a thumbs up that the below interpretation is correct:

In my scenario I didn't know I could mock up a 1099 R back when filing my 2017 return for my distribution of excess contributions in 2017 (and was incorrectly told by my investment guy that it would just be taxable in 2018 anyway) so I'm now entering my 2018 1099 R that I just received on an amended 2017 return and finding that I have a small additional excess contribution ($60) now because of the small earnings ($111) from the original excess changing my MAGI which is within the phase our range.  I think I need to sell the new small $60 excess and earnings on it now and mock up a 2nd 1099 R now to include on my amended 2017 return along with the 2018 1099 R I just received for the first sale of excess contributions last year....I'll read the 2017 instructions for 1099 R to hopefully get the codes right on the mock up, but its a bit confusing to me handling both 1099 R forms on a single amended return.

[macuser_22]

@brian.b.clarke - If you have 2 2018 1099-R's  one with a code P and one with a code 8, then the coed P is entered on an amended 2017 tax return and the code 8 on the 2018 tax return.

Contributions are taxed in the year contributed and earnings in the year returned.

[brian-b-clarke]

Thanks for the reply! I'm slightly confused by your last line, I thought the whole endless loop happens because the earnings on the sale of an excess Roth IRA contribution were taxed back in the year the contribution was made, not in the year returned (different than a regular IRA perhaps?), which in turn is causing the change in MAGI and the 2nd round of small extra excess contribution.  

However, I think I understand what you are getting at.  I have a 2018 1099-R with code "JP" from the first excess contribution sale I performed a year ago (sale in early 2018 for 2017 contribution) to file with my amended 2017 return, and then I'll need to mock up my own 2018 (or is it 2019?) 1099-R for another sale I need to do now for the small new $60 excess generated by that first sale.  Maybe what you are saying is that for this second sale/1099-R I'll need to use code "J8" and file it with my 2018 return?  I think that makes sense to me...these codes get confusing because they are relative to the year...I'll review the 2017 and 2018 instructions.

[dmertz]

macuser_22's comment refers to corrective distributions from qualified retirement plans, not from IRAs, where two Forms 1099-R would be received.  For a return of contribution from an IRA there would be only one Form 1099-R.

[brian-b-clarke]

In reading the instructions for both the 2017 and 2018 tax year for 1099-R and 5498, I believe I need to file the 2018 1099-R I recently recieved for the first excess contribution distribution (with code JP implying a 2017 taxable contribution) with my 2017 amended return.  I also need to file another 2018 1099-R for the resulting second smaller distribution I will execute ASAP (also with code JP) since the earnings on both are taxable in the year the contributions were made (for Roth IRAs), 2017.  Who knows if I could combined these 2 separate distributions 1 year apart into a single 1099-R.  I think I'll try to do them separately.

So frustrating to spend the time on something that amounts to an extra $50 or so in taxes.