Excees IRA Roth Contrinutions for 2021 -- How to Correct

[JEK66]

I am using Turbo Tax Deluxe and just discovered that my $3,600 in Roth Contributions for 2021 (made between January to September) is considered "excess" because my married filing jointly adjusted gross income is now too high. This is the first time this has happened. Turbo Tax says I can contact my fund manager and have this excess withdrawn (plus earnings) before April 15th to avoid the penalty. However, I am 66 and actually withdrew way more than $3,600 from this Roth IRA account in for the first time in 2021 in October. Can this count as correcting this mistake or do I need to still withdraw this $3,600 (plus earnings) to correct this situation? Thank you. JEK66

[DaveF1006 · Accepted solution]

No because distributions and contributions are two different things and one cannot offset the other especially in a case where the contribution is limited because of AGI considerations. As a result, you should withdraw the contribution to avoid the 6% penalty for making the excess contribution. After making arrangements with the trustee to pay back the excess, here is how to report in Turbo Tax according to irene2805 in her awesome Turbo Tax post.

TurboTax Online

1. Click on Federal > Wages & Income.
2. Scroll down to the Retirement Plans and Social Security section and click on the Start/Revisit box next to IRA, 4701(k), Pension Plan Withdrawals (1099-R). 
3. If you've already entered one (or more) 1099-Rs, you will see a screen Your 1099-R Entries.  Click the Edit link next to the 1099-R you wish to review.   
4. On the screen, Tell us if you moved the money through a rollover or conversion, mark the radio button,  I rolled over some of all of it to an IRA... and click Continue.
5. A few screens after the 1099-R input screen, you should see a screen, What Did You Do With The Money From 401k institution?  Mark the radio button next to I moved the money to another retirement account (or returned it to the same retirement account).  
6. On the next screen, Did you rollover the gross amount of $XX (Box 1)...  mark the appropriate radio button and click Continue.

TurboTax CD/Download

1. Click Federal Taxes > Wages & Income > I'll choose what I work on
2. Scroll down to the Retirement Plans and Social Security section and click on the Start/Revisit box next to IRA, 4701(k), Pension Plan Withdrawals (1099-R). 
3. If you've already entered one (or more) 1099-Rs, you will see a screen Your 1099-R Entries.  Click on the Edit link next to the 1099-R you wish to review.   
4. A few screens after the 1099-R input screen, you should see a screen, What Did You Do With The Money From this Payer?
5. Mark the radio button next to I moved the money to another retirement account (or returned it to the same account).
6. Below the grey line, click the radio button next to I rolled over all of this money to an IRA or other retirement account (or returned it to the same account).  Click Continue

[fanfare]

Why did you take out and then contribute?

an excess is an amount contributed that was not allowed.

You have until Tax Day to withdraw an excess contribution.

You have to have the Custodian calculate the earnings you received on the excess amount which went in after you took your first 2021 distribution.

If you wait a year, beyond the due date of the tax return for 2021 including extension,

you do not have to take out the earnings. you only have to take out the contribution, and pay  the 6%  penalty.

If your Roth is growing this is something to consider.

[fanfare]

last paragraph corrected !

[JEK66]

Still a little confused.  I put in monthly contributions totaling $3,600 in 2021 into my Roth IRA not knowing that my adjusted gross income for 2021 would exceed the income limit (income was only $262 over).  So, do I contact my Roth IRA fund manager, and withdraw this $3,600 contribution plus earnings?  How will I show this was withdrawn in Turbo Tax Deluxe (and to the IRS) to avoid paying the 6% penalty? JEK66    

[fanfare]

you will get a 1099-R in 2023 showing the excess earnings.

meanwhile the custodian will return the earnings to you so you will know the answer.

If positive, you want to include that excess on your 2021 tax return, 1040 Line 4b.
Request a 4868 extension if necessary.

Otherwise you will have to amend your 2021 tax return next year.

If negative, the amount of earnings to report is zero.