Option 1
You can recharacterize the Roth contribution as a traditional IRA contribution, make it nondeductible and then later convert it to the Roth (backdoor Roth contribution).
If you want to recharacterize the contribution you need to request this with your bank before the due date. You will enter the recharacterization when you enter the contribution to the Roth IRA
- Login to your TurboTax Account
- Click on "Search" on the top right and type “IRA contributions”
- Click on “Jump to IRA contributions"
- Select “Roth IRA”
- Answer “No” to “Is This a Repayment of a Retirement Distribution
- Enter the Roth contribution amount
- Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
- TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
- On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible and you only get a screen saying $0 is deductible)
Option 2
You can request to withdraw the excess contribution and earnings by the due date. The earnings will be included in the taxable income for the year in which the excess contribution was made. Please keep in mind that this will increase your MAGI again. Therefore, you might have to withdraw some extra excess contribution to not be caught in a loop.
If you are under 59 ½ then you will have an 10% early withdrawal penalty on the earnings.
If you withdrew a 2020 excess contribution plus earnings in 2021 before the due date, then you will get a 1099-R 2021 in 2022 with codes P and J. This 1099-R will have to be included on your 2020 tax return and you have two options:
- You can wait until you receive the 1099-R 2021 in 2022 and amend your 2020 return or
- You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.
To create a 1099-R in your 2020 return please follow the steps below:
- Login to your TurboTax Account
- Click on the Search box on the top and type “1099-R”
- Click on “Jump to 1099-R”
- Answer "Yes" to "Did you get a 1099-R in 2020?"
- Select "I'll type it in myself"
- Box 1 enter total distribution (contribution plus earning)
- Box 2 enter the earnings
- Box 7 enter P and J
- Click "Continue"
- On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
Option 3
Leave the excess contribution in the Roth IRA and apply it to next year’s contribution if you expect your MAGI to be lower. You will have to pay the 6% excess contribution penalty for 2020. When you file your 2021 return you will be able to apply the excess contribution as a 2021 contribution during the interview.
Option 4
If you had a decent amount of earnings, then you might want to wait to remove the excess contribution until after the due date of the return. Then you can request a regular distribution to remove the excess contribution (without earnings) between October 15 and December 15, 2021. You will have the 6% excess contribution penalty on the 2020 return but you can keep the earnings in the Roth account.
Conversions are not included in the MAGI for Roth IRA purposes: Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes.
[Edited 3/21/2021 5:00am PST]
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