1099R box 7. Possible wrong code?

[kojajt]

Hi, I put some money  into daughters Roth when she didnt have any earned income. I contacted ameritrade and received and filed a removal of excess form.  There were 2 contributions in 2021, one $1000.00 contribution was made early in 2021and was earmarked for application for 2020 contribution .  She received  a 1099r with a removal of $1000.00 exactly.  The box 7 code was "J".    The removal of excess paperwork was submitted with the T D Ameritrade calculates earnings option selected.     I also had 10% federal and 6% state tax withheld.  The excess removal was filed and money paid back by check in March 2022.  Nothing has been done tax wise with it till now, and I am currently trying to figure it out. I believe the box J is incorrect  and that IRS will not see this as a removal of excess but as just an early withdraw of funds and penalties could keep accruing.

  The other contribution was made in 2021 for credit to tax year 2021 ira contribution limit.  The removal of excess form was filed in 2022 and check received in 2022. Box 7 codes were P and J . 

    I contacted Ameritrade about the code J  for removal of excess of the $1000.00 and got pushback about changing the code.  They said that it wouldnt get the code P as the contribution was for credit to 2020 ira contribution limit  even though the contribution was made in 2021. I said what about no code indicating removal of excess and the they said dont worry IRS knows that it is a removal of excess anyway.

       My big questions are  1).         Is code J correct for removal of excess of the $1000.00  for contribution to tax year 2020. If not, can I just put the correct code into turbotax or must I get Ameritrade to correct the 1099R with a correct code.

   2).    Is code   J, P correct for the other withdraw of excess?    The contribution was made in 2021 for credit to 2021 contribution limit. No taxes were taken from this smaller contribution that was removed from the Roth.   

The removal was transacted in 2022 as was the other amount as well.  Is it possible both should be coded  "8".

3). Its possible I may have made invalid contributions to my IRA's for earlier years going back some years as well. If I have those removed in the future what codes should I expect to see?

4).   Does turbotax caution you if an invalid contribution is made.  Mine may have exceeded my earned income and be invalid.   I have been retired for a number of years with most retiremennt income being pension and social security.        Thanks for any and all help.  Sorry it is so long question.

[dmertz · Accepted solution]

1)  Yes, code J is correct.  The distribution was obtained too late to be able to be done as a return of contribution to avoid the 6% excess contribution penalty on the 2020 tax return.  If the 2020 tax return did not include Form 5329 reporting the excess Roth IRA contribution for 2020, that form must be filed and the $60 penalty paid.  The excess $1,000 contribution for 2020 carries forward to 2021 where it is again subject to a 10%, $60 penalty on a 2021 Form 5329.  The code-J distribution in 2022 corrects this excess and will reduce the $1,000 excess carried into 2022 from 2021 to zero on the 2022 Form 5329.

2)  Yes, codes J and P are correct for the return of the excess contribution for 2021.  This return of contribution avoids any excess contribution penalty on the original contribution made for 2021.

3)  If you have any excess contributions made for years prior to 2022, those would be corrected by making a regular distribution of exactly the amount of the excess with no adjustment for investment performance.  You would also have to file a Form 5329 and pay the penalty for each year that there was an excess contribution in your Roth IRAs.

4)  Yes, TurboTax informs you of an excess IRA contribution and prepares Form 5329 to assess the penalty, assuming that you enter the contribution and do not resolve the excess contribution before the due date of the tax return, including extensions.

[kojajt]

Thank you for using your expertise to give me a reply to my tax question .  II find doing the IRA's  the toughest part of my yearly tax routine.  With theYour answer gives me another question/s though.  Do I need to file amended returns for Form 5329 for either of those 1099s  for tax year 2020 or 2021. Thanks again for your help.

[kojajt]

Oh and by the way, this tax issue is for my daughter who is a student and had no income for tax years 2020 and 2021, so she didnt file returns at all for these years.    So previous question should have been....should she file a return for 2020 and 2021  and submit the form 5329  or could she just send in form 5329 for these years.  Thanks .

[dmertz]

Form 5329 can be filed stand-alone, but if an original tax return was filed for the particular year (in the case of your excess contributions, not your daughter's excess contributions) it's probably best to include Form 1040-X to establish that there is no other change to your originally filed tax return.

[kojajt]

Hi dmertz, I filed a 1040 with form 5329 showing I had made the excess to daughters IRA for tax year 2020 and that the excess was not removed  by tax filing time for tax year 2020. A 60 dollar fine was assessed and paid. As I mentioned in original question, the excess of $1000 for 2020 (and the 10 excess for tax year 2021) were both removed in March of 2022 before the filing deadline for tax year 2021.

  You mentioned in reply......The excess $1,000 contribution for 2020 carries forward to 2021 where it is again subject to a 10%, $60 penalty on a 2021 Form 5329.      If I removed the $1000  2020 excess contribution that carried over into 2021 before April 18 2022 (tax filing deadline)  would I be subject to the $60 penalty?  Thanks for the clarification.

[DanaB27]

Yes, you will be subject to the 6% penalty for the 2020 excess on your 2021 tax return/ 2021 Form 5329 because the 2020 excess wasn't removed by December 31, 2021. The extended time until the due date of the 2021 tax return would only apply to a 2021 excess contribution, not to the 2020 excess.

@kojajt 

[dmertz]

The deadline to make the $1,000 regular distribution to avoid a 6% penalty for 2021 was December 31, 2021.

[kojajt]

Hi, still a bit confused here. Can you explain what year the 1099 R for the $1000 excess contribution for tax year 2020 should be filed too.  It says 2022 Form1099R on top.   Would I report this 1099R on a amended 2020 return?

This excess was removed last year  on March 15 2022.  Fidelity only returned the excess contribution with no earnings calculations.  What happens with those if there are any? How are they accounted for. Thank you

[dmertz]

The regular distribution of $1,000 in 2022 is reportable on your daughter's 2022 tax return.

Because 6% penalties for 2020 and 2021 are paid, the earnings on the $1,000 remain in the Roth IRA.

[kojajt]

Okay, the 1099R for $1000 excess contribution gets reported on 2022 return.       However, the other 1099R 2022, $10 excess contribution  (plus $0.15 earnings)  removal for 2021 which was removed before the filing deadline the next year in 2022 gets reported  on the 2021 return  correct?   Thank you for your patience and for your guidance.

[DanaB27]

Yes, the regular distribution of $1,000 reported on the 2022 Form 1099-R code J will be entered on the 2022 tax return.

Yes, the 2022 Form 1099-R with codes P and J for the 2021 excess contribution plus earnings will be entered on the 2021 tax return.

@kojajt 

[dbtrade1]

I have this same problem with TDAmeritrade.
I made an excess deposit for tax year 2021 of $7000 in late January 2022.
In mid March I realized my mistake and filed for a return of excess contribution. Well before the tax due date by weeks.
While they sent the original deposit as marked for 2021, they have coded the excess withdrawal as an early distribution. And they say doesn't matter when the request was made, it is an early withdrawal for 2022.
They coded the 1099-R for 2022 as 8, J

Is this enough info?

How would you all handle this? 

[dmertz]

In the case of a return of contribution from a Roth IRA before the due date of the tax return, code J is always present to indicate that the distribution is from a Roth IRA and does not necessarily mean that the distribution was an early distribution.  If you were over age 59½ at the time of the distribution, you can claim an Other reason exception on line 2 of Form 5329 to eliminate the penalty on the taxable amount.

[dbtrade1]

That's awesome! I really appreciate the info and the quick response.
This goes on the 2022 and not to an amended 2021?