10% Penalty on Corrective Distribution from Roth IRA

[bdmiki20]

In February 2024, I realized that I had contributed too much to my Roth IRA for the 2023 tax year.  I contacted my brokerage to remove the excess contributions and earnings before the tax filing deadline for the 2023 tax year.  I am now filing an amendment to my 2023 tax return now that I have recieved the 1099R related to this distribution.  Note that the 1099R is dated for 2024.

Based on what I have been reading here, "Beginning on December 29, 2022, the 10% additional tax on early distributions will not apply to a corrective IRA distribution which consists of an excessive contribution and any earnings allocable to the excessive contribution, as long as the corrective distribution is made on or before the due date of the income tax return."  I removed my excess contributions before the tax return due date, so I believe the 10% tax should not apply.  However, when I review my 1099R, I see a value in Box 4 which appears to be 10% of the earnings.   Is this correct?  Below is a summary of my 1099R and my and my excess contributions in 2023.

Total Excess contributions to Roth IRA for 2023 = $3500

Gross Distribution = $4071.06  ($3500 contributions and $571.06 earnings)

Taxable Amount = $513.95

Federal Income Tax Withheld = $57.11 (10% x $571.06)

I feel like I should be getting the $57.11 back and the total earnings of $571.06 should be added to my income.  Any help would be appreciated.

[Opus 17]

Box 4 is withholding.  The IRA custodian might have withheld some for taxes automatically.  Do you remember that there was withholding and you did not get the full amount?

In any case, the distribution is subject to regular income tax, but not the penalty.  Your amended tax return will calculate the amount of tax you owe, and the withholding will be applied against that tax.  If you owe more, you will be told to pay it, and if the withholding is more than the tax owed, you would get a refund. 

So yes, the $571 is taxable income, the tax on that is likely to be between $68 and $137, depending on your filing status and other income (12-24%), the $57 of withholding goes to your credit, and you will likely have to include a check for the rest with your amended return.  This will all happen automatically. 

[bdmiki20]

Is there a place in the turbo tax forms that I could look to see that this $57 credit is applied?

As far as I can see, it is not being applied.  Since this is an amendment, I am reviewing the 1040X form and it shows the following.

Net Change in Taxable Income = $513.95

Net Change in Tax Liability = $123 (24% x 513.95)

[dmertz]

Total Excess contributions to Roth IRA for 2023 = $3500

Gross Distribution = $4071.06  ($3500 contributions and $571.06 earnings)

Taxable Amount = $513.95

The taxable amount reported on this Form 1099-R is incorrect.  The taxable amount has to be $571.06 because the tax withholding is not permitted to be subtracted from the taxable amount.  The payer needs to correct this Form 1099-R.

The penalty exception for the earnings distributed can be claimed on the $571.06.

[Opus 17]

---

@bdmiki20 wrote:

Is there a place in the turbo tax forms that I could look to see that this $57 credit is applied?

The withholding will be on line 25b of form 1040.  If you are using TT online, you can't see the actual forms until you pay the fee, but you can access a summary.  If you are using the desktop program, switch to forms view. 

[bdmiki20]

I thought that seemed incorrect.  Thanks for the confirmation.  I'll ask my brokerage for a corrected 1099R.  Do you know how long it typically takes for Vanguard to fix one of these and return it?

[bdmiki20]

I am using the desktop version, so I can see the forms.  There is nothing on line 25b for my form 1040.  I double checked that I entered my 1099R correctly.  Everything seems correct.  Can I just manually enter this in the form on turbo tax?