1099-R excess Roth contributions Inaccurate penalty?

[polkadots]

My spouse and I had excess Roth IRA contributions in 2019.   This was ID's when completing Year 2019 taxes in 2020.  Before the July 15, 2020 tax filing deadline for Year 2019 we withdrew the excess contributions and interest.  Just recently we received 1099-Rs for the distributions (Form Year 2020).  I entered the1099-Rs for my 2020 taxes (which noted PJ in Box 7) and upon doing so noticed the refund amount decline.  I have not submitted the 2020 tax return  yet but previewing the forms it shows a Form 5329 generated with notations for Additional Tax (6% penalty) for Line 25 amounts for both my spouse and I.   Since the excess contributions were removed before the tax filing deadline for 2019 isn't this penalty assessment inaccurate?  Trying to ID what I may have entered wrong. 

I appreciate the help!

[DanaB27 · Accepted solution]

Please make sure that you do not enter anything on the "Enter Excess Contributions" screen under "Excess contributions in prior years" when you go through the IRA contribution screens. You do not have an excess contribution in 2019 since you withdrew the excess with the earnings.

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Continue through the questions until the "Enter Excess Contributions" screen and delete any entries.

Please be aware that you will have to amend your 2019 tax return to include the 1099-R with codes P and J unless you already had created a 1099-R to report the withdraw of excess contribution and earnings when you filed your 2019 tax return. Please see How do I amend a 2019 return in TurboTax? for information.

[dmertz]

What you did wrong is that either the 2019 tax file transferred in to start your 2020 tax return did not reflect the removal of the excess contributions and might mean that you need to amend your 2018 tax return to eliminate the penalty for 2019 as well, or when 2020 TurboTax asked if you had any excess contributions for years prior to 2020 you mistakenly answered yes and entered the amount of the original excess contribution despite having no excess contribution for 2019 after receiving the corrective distribution.

[polkadots]

@DanaB27  Thanks so much -- this was my problem, I had entered the excess contribution amounts even though I had withdrawn them and the earnings.  Removing these figures has removed the penalty.  Thank you!

Two follow up topics,

1.  Box2a on the 2020 1099-Rs was zero for both my spouse and I but I did prepare (but haven't sent yet) an amended 2019 tax return including the two 1099-Rs (which as you note had P and J on them).  I also entered these 2020 1099-Rs on our 2020 tax return under the Wages & Income section.  Since they are 2020 tax forms my assumption is that they should be entered on our 2020 tax return (as well as being used to amend the 2019 tax return).  Is that correct?

2.  My spouse made an excess contribution again in 2020 which he will withdraw before 4/15/21.  If able to confirm the total withdrawal of excess contributions and earnings I believe I can "create" a 1099-R and include it on our 2020 tax return now so I do not have to amend it when he gets another 1099-R next year, is that accurate?  

For the "created" 1099-R would I say it's a 2021 1099-R?

Next year, when filing my tax return for 2021 I will enter the 2021 1099-R under Wages & Income section but will not need to amend 2020, correct?

Thankfully we have Roths straightened out this year, so we shouldn't have this issue again!

I appreciate your help!

[DanaB27 · Accepted solution]

1) If the 1099-R 2020 with code P and J does not have any withholdings in box 4  (federal) and/or box 14 (State) then there is no need to enter it on your 2020 tax return. But you can leave it in there if you entered it already because the code P on a 1099-R 2020 won't carry anything to your 2020 return except taxes withheld.

2) Yes, you can create a 1099-R 2021 to avoid to have to amend your 2020 tax return:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2 enter the earnings
7. Box 7 enter P and J 
8. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

 Yes, the created Form is a 1099-R 2021 that you will receive in 2022.

Yes, if you include it like mentioned above than you will not need to amend your 2020 return when you receive the 1099-R 2021 in 2022. You will only enter it on your 2021 tax return if there is Box 4 Federal Tax withholding and/or box 14 State withholding.

[polkadots · Accepted solution]

@DanaB27 

Follow up on the creating my own 2021 1099-R.

Excess contribution amount was $230.  Withdraw amount was $249.31 (which should be excess contribution + earnings).

When creating my own 2021 1099-R for this --

Box 1 - $249.31

Box 2  - If earnings, doing the math it would be $19.31, correct?

After entering this information when I review my tax forms it shows on the 1040 4a 249 and STMT and 4b $19, which seems like it could be right.  But then it generated a 5329.  

5329 has --

1 - 19

3 - 19

4 - 2

18 - 0

23 - 10

24 - 10

25 -1

Trying to validate that that I've entered the 2021 1099-R info correctly and this is only taxing (not penalizing) the excess contribution earning amount.  When entered as noted it reduced my tax refund by $8.

[dmertz · Accepted solution]

If you were under age 59½ at the time of the return of contribution, Form 5329 Part I is correct.  You owe a $2 early-distribution penalty on the penalty on the $19.31.  If you were age 59½ or over, you must claim an Other reason exception to the early-distribution penalty on the $19.31.

Regarding Form 5329 Part IV, it appears that your MAGI is in the phase-out range for a Roth IRA contribution and the $19.31 added to your AGI has caused an additional $10 of your spouse's 2020 Roth IRA contribution to become an excess contribution.  This is to be expected when the Roth IRA has experienced gains and your MAGI is in the phase-out range for a Roth IRA contribution.

Your spouse could obtain obtain a return of contribution of an additional $10, resulting in a distribution of about $11, adding $1 more to your AGI.  This small change in AGI should not cause any more of the Roth IRA contribution to become an excess contribution, but it would be worth checking before obtaining the distribution.  Alternatively, just pay the $1, excess contribution penalty for 2020 and your spouse can either apply the $10 of excess contribution as part of a 2021 Roth IRA contribution  (assuming 2021 MAGI will be low enough to accommodate a Roth IRA contribution), or simply obtain a regular distribution of $10 between October 15, 2021 and December 31, 2021 with no adjustment for investment gains.

[michael160]

how do I fix that