2023 Excess Roth IRA Contribution

[manisman1995]

In 2023 My wife and I made excess  contribution of $1200 each to our Roth IRAs.  We were over the AGI limit.  I just caught this in Jan 2024 in prep for 2023 taxes.  I have successfully requested the excess from Vanguard for both of us.  We did both have some gain.  How do I handle this in TurboTax?  Do I say "yes" I made an excess contribution or "no" because I have pulled it back before I filed? Also, how do I handle the gain for each of us as I was told I will not get a 1099R till next year because the distribution for pulling back our excess 1200 + gain each happened in 2024?  Thank you

[Opus 17]

You do not report the contribution, because it is as if it never happened.

You do report the earnings on your 2023 return (this year).  You can create a "substitute 1099-R" to report the dollar amount (actually, 2 substitute 1099-Rs, one for each spouse's account).  Use code J for the distribution code in box 7.  The distributed earnings may be subject to income tax and a 10% penalty, depending on your age and how long ago you opened the IRAs.  

Then, next year, the 1099-R you receive will have code P, meaning a distribution of earnings due to a corrective withdrawal that was taxable in the previous year.  You include it on your return but you won't pay tax again.  

[manisman1995]

So, just to be clear I do NOT use a code of PJ like I have read elsewhere? I will only use a code of J?  What is the difference of code 1 and J? They look the same and in a previous 1099 distribution Vanguard used a 1 not J. Also, in the the 1099s I make up for each spouse, do I put the whole distro in box 1 (1200+gain) and in 2a just the gain?  Thanks again.

[Opus 17]

The amount of the 1099-R is the earnings only, you didn't actually withdraw any contributions because the contribution never happened (once it is removed).

Code P is definitely wrong because, on a 2023 1099-R, code P would mean a withdrawal of earnings that was taxable in 2022, which is not what is going on.

My best guess is code J, but if you are under age 59-1/2, code 1 would work just as well since it tells Turbotax to tax the whole thing and apply the penalty. 

[manisman1995]

so for box 1 and 2a, i should only put the gain. Or should I leave  2a blank and check box 2b "amount not determined"

[AnnetteB6 · Accepted solution]

You will enter the total distribution (contribution plus earning) in box 1 and the earnings in box 2a.

You will get a 2024 Form 1099-R in 2025 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:
 

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 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 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 return please follow the steps below:
 

1. Login to your TurboTax Account
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2024 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

@manisman1995 

[manisman1995]

I am now a bit confused...Opus previous said I do not need to report the 1200 excess contribution just the gain that it made.  But if I understand your guidance, you are stating that I should put 1200 in the box 1 and the gain/earning it made in box 2a and use the the code PJ? Did I understand that correctly and then use the special instructions to answer the "which year...?" question?  Vanguard made two separate transaction for each me and my spouse.  We each had a one transaction/distribution for 1200, this was the excess due to being over the AGI  limit. And then we each had another transaction/distribution for gain/earning that 1200 made in 2023.  So, does this mean what Opus said about is not acceptable? Just forget about the 1200 and treat it like it didn't happen and only report the gain on a made up 1099R. Or is your advice the more appropriate way to handle.  Just confused now.  I see the logic in both.  Thank you.

[Opus 17]

@manisman1995 

In re-reading the instructions, what the IRA custodian is instructed to do is report the entire amount in box 1 and the earnings in 2a.  Then the instructions say "Enter code J and Code 8 or P".   My argument here is that code P is appropriate for the 1099-R that the custodian will issue next year, since next year, code P will mean "excess earnings distributed in 2024 but taxable in 2023."

Part of the problem here is that the IRS does not actually need or want a substitute 1099-R on your 2023 return.  They just want you to put the total distribution on line 4a of form 1040, and the taxable amount on line 4b.  If you are over age 59-1/2, the taxable amount is zero.  The requirement to create a fake 1099-R is required by Turbotax because of how Turbotax uses the forms and hidden internal worksheets to calculate the amounts to enter on line 4a and 4b.  The fake 1099-R is used to make Turbotax put the numbers in the right place without having to manually edit the tax return.

If you create a substitute 1099-R in 2023, using code P will mean "earnings distributed in 2023 that were taxable in 2022" which is not the case.  So I would argue that you should use code 8J and not JP.  But since this is just being used to trick Turbotax into putting the numbers in the right place, it probably doesn't matter too much.  

https://www.irs.gov/instructions/i1099r#en_US_2023_publink1000291991

"However, for the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a. Enter Code J and Code 8 or P in box 7."

[manisman1995]

I do have one follow-up question to this advice.  What is the purpose of  #12, why is that needed to add the gain/earnings the $1200 made?  I don't really understand why that is needed?

thank you

[Opus 17]

---

@manisman1995 wrote:

I do have one follow-up question to this advice.  What is the purpose of  #12, why is that needed to add the gain/earnings the $1200 made?  I don't really understand why that is needed?

thank you

---

Turbotax always asks what you used IRA funds for (it's not an optional question you can skip).  This is because there are certain things you are not allowed to do.  For example, if you are past your RMD beginning age, you can't rollover an IRA withdrawal into another IRA unless you first withdraw your RMD (you can't rollover an RMD).  Your answer here will not change your tax return in any way, but Turbotax asks to make sure you aren't using the money for something prohibited.   Also, for someone under age 59-1/2, the question may be used to determine the returned contribution is not taxable.  (Even though Turbotax should already know this from your age, the program has a very rigid internal structure and the questions it asks do not always take the full context into account.)

[manisman1995]

You state:

Also, for someone under age 59-1/2, the question may be used to determine the returned contribution is not taxable.  (Even though Turbotax should already know this from your age, the program has a very rigid internal structure and the questions it asks do not always take the full context into account.)

That is exactly why I am asking, as neither my spouse or I yet 59-1/2.  By putting our gains/earnings in the  corrective distribution box, I notice TT removed our gains from the 10% penalty.  Now, both of us have had Roth's for more than 5 years so just want to be sure, but I thought you are always taxed/penalized on earnings if < 59-1/2. Therefore, is the right thing to do, putting our gains/earning in the corrective distro box or leaving that blank? I would think we need to pay the 10% penalty tax on our gains, therefore NOT enter the earnings in the corrective distro box?

Thanks again.

[Opus 17]

The corrective distribution is $1200 (for each spouse, according to your explanation) and is not taxable.  The earnings are subject to income tax plus 10%.

If the instructions provided by the Turbotax expert are confusing or not quite correct, we can evaluate that and ask them to change their instructions.

@dmertz Can you assist please?

[manisman1995 · Accepted solution]

That doesnt make sense to me.  I been monitoring the changes TT makes to Form 5329 (Additional Taxes on Qualified Plans).  If you put the 1200 contribution in the corrective distro box then that is greater than the gain/earnings, which defeats the logic:

Line 1 form 5329: Early distro includible in income . For Roth IRA distros.

- for me lets say for simplicity that is 100 (gain/earnings)

Line 2 form 5329: Early distros included in line 1 that are not subject to additional tax.

- whatever you put in Corrective Distro gets added here.  Herein lies the problem.  Logic says this this line has to be < line 1.  I can see where AnnetteB6 said to put the gain/earning there but only if I was => 59-1/2.

Beings that I am < 59-1/2, the form works if I just leave Corrective Distro blank and don't enter anything when prompted, "Did you use your IRA to pay for any of these expenses?" screen.  By not inputting anything here TT from the 1099R I created: 1-Full distribution (contribution+earnings), 2a-earnings only,  with PJ code picks up the earnings as taxable in form 5329.  Seem whatever I put in Corrective Distro impacts what is subject to 10% penalty and each or our earning are in fact subject as I stated b/c we are < 59-1/2.  

Does that make sense? 

That is why I am unclear on the Corrective Distro box.  In my case it seems I should leave blank, therefore TT assigns my gain/earnings to be penalized as they should be.  But if I put earnings in the box, the gain/earnings are excluded from the penalty, which is wrong.  

Thanks in advance.

[AnnetteB6 · Accepted solution]

Actually there was a change in the rules regarding corrective distributions that started with distributions made on December 29, 2022 or later.    The summary is that the 10% additional tax will not apply on the earnings that were taken as part of a corrective distribution.  The age of the participant taking the distribution is not taken into account if it is a corrective distribution.

Here is a quote from Pub 590-B ( 2022 since unfortunately the 2023 isn't out yet) under What's New: 

"Certain corrective distributions not subject to 10% early distribution tax. Beginning with distributions made on December 29, 2022, and after, the 10% additional tax on early distributions will not apply to a corrective IRA distribution, which consists of an excessive contribution (a contribution greater than the IRA contribution limit) and any earnings (the portion of the distribution subject to the 10% additional tax) allocable to the excessive contribution, as long as the corrective distribution is made on or before the due date (including extensions) of the income tax return."

Also, the Instructions for Form 5329 line 2 (see page 4) show exceptions to the 10% early distribution penalty.  In this case exception number 21 may be used.

@manisman1995 

[manisman1995]

Thank you.  That makes sense with  your original reply of earnings in the Corrective Distro.  And yes, I confirm when I put earnings in corrective distro box, that form 5329 uses code 21 to exclude my earnings from the penalty.  Thank you for that information, because I just assumed that my earnings would not only be taxed, but penalized too.  I'll take that 10% back for myself and wife's distributions 😀

Thanks again.