Advice on reporting Roth IRA excess contributions + earnings when 1099-R will have conflicting info.

[dmertz]

The closest thing I've found to IRS guidance is in the IRS discussion of the Tax Reform Act of 1986 where it states in the discussion of the newly allowed ability to make nondeductible traditional IRA contributions:

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C2: What is the rule for removing excess contributions?

A: Prior to the Act, section 408(d)(4)of the Code permitted individuals who had made excess contributions to an IRA to withdraw such excess IRA contributions with earnings by April 15 of the year following the year for which the contribution was made. By withdrawing the excess in such manner, the individual was able to avoid the excise tax under section 4973 of the Code applicable to excess IRA contributions. Under the Act, amounts contributed to an IRA for an individual's taxable year (both deductible and nondeductible contributions) may be treated as excess contributions and withdrawn by the individual by April 15 of the following year. Generally, if an individual is not yet 59-1/2 at the time of the withdrawal, upon withdrawing such amounts the individual will be required to pay the early withdrawal tax under section 72(t) on the earnings (if any) for the year for which the contribution was made.

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This refers to removing the contribution by April 15 of the year following the year for which the contribution was made.

[WEK]

I have this situation as well and wanted to confirm that I should wait to include the earned income and the associated withheld FIT when the 1099-R is generated which will require an amended return since these type of 1099-R forms are generated usually in January.  I have no 1099-R form to support the recognition of the passive earned income that was transferred back to my taxable account from my IRA account, thus the need for an amended return. I returned the net earned income and the contribution of 7000 back to my taxable account prior to the deadline for filing the 2020 tax return, now May 17th.

Thanks

WK

[DawnC]

If you have already filed your 2020 tax return, you will need to amend it when you received Form 1099-R next year.   However, if you have not filed your 2020 tax return, you can report the earnings before you file which will save you from having to amend it later.   You can enter a substitute Form 1099-R to report the earnings.   Then when you received the form next year, you will enter it and can ignore the message to amend.   The FIT will be correctly applied to the 2021 tax return, but the codes in Box 7 will reference 2020, so the entries will not be applicable to the 2021 return.   If you have already filed the 2020 return, then you should wait and amend when you receive the form next year.   

To use Form 4852 to prepare a substitute Form 1099-R, you go through the Form 1099-R section itself.    Then, check the box showing you need to prepare a substitute Form 1099-R and follow the instructions on the screen.  

@WEK       See the picture below for a visual reference:

[WEK]

Thanks Dawn C,

I am working on my return as your timely email response came in.  I will try and use the software which will take you through the Form 4852.  I would prefer to do this over amending a return later.  I provided all the numbers to the Investment Firm so I know all the inputs just concerned about any special codes.

Another question related to this is, currently I have not entered in the IRA contribution for tax year 2020 because I had put it in in early 2020 and removed in March 2021 before I filed my return so in a literal answer to the software question in No because I removed the contribution and the earnings associated with it back to my taxable account.  I think this will align with the late 1099-R for 2020 to be received in January 2021, and it will not require an amendment because it has already been incorporated into the 2020 return.

Let me know if I am proceeding properly.

Thanks

WEK

[DaveF1006]

Yes, you performed these steps correctly as I can see.

[uk05]

@DawnC 

I noticed you suggested that for those that will need to amend their 2020 return, its best to wait until the 1099-R is provided early next year.

"If you have already filed the 2020 return, then you should wait and amend when you receive the form next year."

I've already filed my 2020 federal / state returns and both were accepted. I'll need to amend my 2020 federal to account for the earnings gained from excess contributions that were returned in Jan 2021 for 2020 tax year.

While my IRA custodian did provide my 1099-R info in a custom doc that I requested (includes payer info, box 1, 2a, 7 info), I'm evaluating the pros / cons of filing now vs waiting until next year. I'm interested to know what factors you looked at when making the suggestion.

Amend now

- Ability to e-file, which is much faster (pro)

- Pay taxes & penalties immediately to get it over with (pro)

- 1099-R doc is not available yet. Must use IRA custodian provided info, which leaves room for error that could lead to me having to amend again (con)

Amend next year

- E-file option may not be available; would have to mail, which takes longer up to 16 weeks (con). Further amendments could push that out even further.

- Waiting to pay taxes & penalties (con)

- 1099-R will be available with official info (pro)

- Are there any penalties for waiting?

Any insight to make the decision easier would be appreciated. Thank you!

[macuser_22]

@uk05  The ONLY reason to report it now is to avoid the inconvenience of amending.     Since you already filed then you should not amend until you have the actual 1099-R - there is no advantage  to amend now whatsoever.   Amended returns reguardless of how they are filed are currently taking about 6 months to process.   The only tax is on the box 2a amount.

If between now and next year there is another reason to amend or if the actually 1099-R is different from what you expect then you would need to amend the amended return which can lead to many problems and delays.

[uk05]

@macuser_22 

Thank you!

[Yavor]

Hi @DaveF1006 

I have a similar situation but want to confirm 3 things (below).

Summary:

In early 2021 I funded a Roth IRA with $6000 for tax year 2020. Before filing taxes, I realized I had already maxed out my Traditional IRA so I took a return of excess contribution and earning (about $10,400). I applied for an extension and am about to file today. I understand the earnings are taxable in 2020 and I'm trying to include them in my income. 

1) I do NOT enter the excess contribution in the deductions section since I removed it (and earnings on it) in a timely manner, correct?

2) What code should I use on the 1099-R I am filling myself (since broker will not send me one until next year) - 8 or T or something else? 

3) Should I enter entire distributed amount (excess contribution and earnings) in box 1 and just the taxable earning in box 2? 

Thank you!

[macuser_22]

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@Yavor wrote:

Hi @DaveF1006 

I have a similar situation but want to confirm 3 things (below).

Summary:

In early 2021 I funded a Roth IRA with $6000 for tax year 2020. Before filing taxes, I realized I had already maxed out my Traditional IRA so I took a return of excess contribution and earning (about $10,400). I applied for an extension and am about to file today. I understand the earnings are taxable in 2020 and I'm trying to include them in my income. 

1) I do NOT enter the excess contribution in the deductions section since I removed it (and earnings on it) in a timely manner, correct?

2) What code should I use on the 1099-R I am filling myself (since broker will not send me one until next year) - 8 or T or something else? 

3) Should I enter entire distributed amount (excess contribution and earnings) in box 1 and just the taxable earning in box 2? 

Thank you!

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*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2020 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now 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 also 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 JP will not do anything in 2021 but the withholding will be applied to 2021.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2020 tax return to avoid having to amend in 2021.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

[Yavor]

Thank you, this makes sense mostly.

I just still don't see why box 7 code would not be "8"  - Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020.

But i figured there's a good reason for that and filed just now based on your instructions.

Thank you for the quick and clear response, much appreciated!

[macuser_22]

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@Yavor wrote:

Thank you, this makes sense mostly.

I just still don't see why box 7 code would not be "8"  - Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020.

But i figured there's a good reason for that and filed just now based on your instructions.

Thank you for the quick and clear response, much appreciated!

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A code 8 would indicate a contribution made in 2021 *for* 2021 and returned in 2021.    A code JP in a 2021 1099-R means a Roth (the code J means Roth) contribution *for* 2020 returned in 2021 which is what you have.   (The meaning of code P and 8 advance by 1 each year which is why TurboTax will ask what year the 1099-R is for - 2020 or 2021.  You will get a 2021 1099-R for the 2020 return so it must b a code P.)

[Juir]

Yes, but sometimes it is your first encounter with contributions to a Roth IRA during retirement.  You can only put money into a Roth IRA if you have earned income and not just retirement income from funds or SS.  We didn't catch this until we were doing our taxes with Turbo Tax after Dec. 31st.

Now, it seems impossible to fix the right way.

In order to make the return of excess contribution amount and earnings on this excess amount of Roth IRA go into the right line of 1040 which is 4a and 4b using TurboTax , you have to make up a fake 1099-R for the year of the contributions and earnings since the one from the financial institution won't arrive until the following year.  The only code for box 7 that would do this is Code 8 and checking the box of IRA/SEP/Simple.  Code J is for Roth, but it is for early withdrawal of Roth funds which ours isn't an early withdrawal.

This is a mess that is consuming me as I like to do my taxes right and not have any issues.  Why doesn't TurboTax have questions that steer you through handling the fact that you have to pay taxes on earnings of excess contributions to a Roth IRA in the year they were made.  Advice has been to make up a Substitute 1099-R.  The company will send us one in 2023 for 2022.  But now they have sent a letter with the correct amounts of earnings on excess contributions for 2021 and have returned contributions and earnings in early 2022.  I'm not comfortable with how I had to fix this.

[Juir]

Someone recommended you as an expert on this subject, so here goes.  And this is same problem other people have had and TurboTax doesn't handle well.

My husband worked a half year in 2020 and then retired, so we didn't have this problem in 2020.  He did not work at all in 2021 and I am retired as well.  We had only retirement income, but no earned income in 2021.  So, we didn't catch the problem until trying to do taxes for 2021 in early 2022.

He made contributions to his Roth IRA in 2021 which is against the rules.  As soon as we realized the mistake in Feb 2022, we removed the contributions and the earnings associated with the earnings.  We got a letter from the financial institution stating the amount of contribution returned and earnings returned.  The 1099-R will come for this transaction in 2023 or 2022.

How do you report the return of excess contribution and earnings on the 2021 return?  TurboTax won't let you just write it in on 1040 line 4a and 4b.  You need to make a 1099-R or substitute 1099-R in order to get the info to go into the right spot on the return.  Is this legal?  I want to report it this year because the earnings are earnings for 2021.  When I made up a substitute 1099-R, the only code for box 7 that would work was code 8.  Code J is for an early withdrawal of Roth IRA funds.  We are over age 60, so this is not an early withdrawal.  It's some sort of corrective withdrawal.  Code P would refer to the previous year of 2020, and that is not our situation.  I also had to check the box for IRA/SEP/Simple which is really for a regular IRA.  If I didn't check this box, TurboTax put the earnings in the wages section of income.  This is not right.

We don't have an accountant since we use TT and it's been great up until this problem.  I tried calling 2 different accountants and the IRS.  Mostly you have to pay for them to do your taxes.  One accountant and the lady at the IRS said don't make a 1099-R.  But that seems to be the only way to do it.  The substitute 1099-R creates a form 4852 which gets e-filed with your tax return.

The amount of taxes we have to pay on these earnings is very small -- $18.  It seems better to do it now than to have penalties put on it later.  How do you do it?

[dmertz]

A Roth IRA contribution made in 2021 but returned in 2022 will be reported on a code JP 2022 Form 1099-R and this is what should be entered into 2021 TurboTax.  2021 TurboTax will ask for the year of the form and treat it as taxable on your 2021 tax return when you answer that it's a 2022 Form 1099-R.  No need to enter this as a substitute Form 1099-R because the actual 2022 Form 1099-R is not missing or incorrect, it just hasn't been issued yet and won't be until 2023.  Your explanation statement for the return of contribution avoids the need to use the substitute Form 1099-R (Form 4852) which would prevent you from e-filing.

A code 8P 2021 Form 1099-R would produce the same result as long as there is no tax withholding (you should decline tax withholding), but is technically incorrect because the return of contribution was not made in 2021.