2020 Roth IRA Excess Contribution, Withdrawn September 2021, Received 2021 1099-R

[Enjolras]

I have an interesting situation that I cannot resolve in TurboTax.

TL;DR: I filed my 2020 tax return with excess Roth IRA contributions, had my financial institution withdraw that excess within 6 months of filing. They added the interest gained and provided a 2021 1099-R. When amending my 2020 tax return, the interest gained increases the reported income enough to further increase my excess contribution amount because my income sits right inside the Roth IRA contribution phase out zone.

The details...

In 2020, I made an excess contribution to my Roth IRA. I had reduced Roth IRA contribution limit because my income landed between $196,00 and $206,000 (right in the middle of the phase out). Therefore, only a portion of my contribution was considered excess. TurboTax let me know that roughly $3,000 was the excess.

I filed my 2020 tax return prior to withdrawing the excess. It included Form 5329 to record the excess and the 6% tax/penalty.

I requested a withdrawal due to excess contribution from my financial institution and on September 9, 2021 they removed the excess, plus the interest it earned (about $800). They sent a 2021 1099-R.

I understand I must amend my 2020 tax return to include the 1099-R.

According to IRS instructions for 2020 Form 5329:

If you timely filed your return without withdrawing the excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” entered at the top. Report any related earnings for 2020 on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

Questions...

1) Given the withdrawal happened within 6 months of the May tax deadline, does this apply to me? I have not yet filed an amendment.

2) On the amended 2020 tax return, should I reduce the amount of my Roth IRA contribution to be the originally submitted amount, minus the excess? Effectively, that would make the amended return appear to have no longer any excess.

3) Because I gained interest on the excess (about $800) as reported on the 1099-R (2a) and entered into TurboTax, my income increased for 2020. It's a small increase, but now that changes where I sit in the Roth IRA phase out. That is, now with the additional income recorded, my excess contribution calculates higher than my original return (by about $500), and the Roth IRA withdrawal now no longer covers the excess.

What do I do here? If I submit in this state, my amended return would still appear to have an excess, that only a portion of the excess was removed.

[DanaB27]

1. Yes you had until Oct 15th to withdraw the excess contribution, therefore you successfully have withdrawn the first excess contribution. You should not have to pay the 6% excess penalty on this amount.

2. and 3. Yes, you will enter the amount withdrawn before Oct 15th (without earnings) on the penalty screen during the IRA contribution interview as the excess withdrawn by the due date. You do not pay the 6% penalty on that amount. But you will have to pay the 6% penalty on the new excess contribution amount for 2020 and for 2021.

For the new excess contribution amount, you will make a regular distribution (without earnings) by December 31, 2022, to avoid any future 6% penalty.

On your 2020 tax return after adding the Form 1099-R:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Continue until you get to the penalty screen and enter the amount withdrawn before Oct 15th, 2021 (without gains).

On your 2021 return to trigger the 6% penalty:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020