Excess 2019 contribution to Roth IRA

[BluuDogg79]

I contributed $6000 to my Roth IRA in Jan 2019.  In doing my 2019 taxes last week, Turbo Tax informed me that my income was too high and only $500 of the $6000 was allowed ($5,500 excess contribution).  I contacted Vanguard and had the 2019 excess contribution returned along with the earnings (approx $2,200).

How do I report these $2,200 in earnings from the excess contribution?  Do I just create a dummy 1099-R?  It's not clear to me in Turbo Tax how I should go about doing this.  Thanks!

[DianeC958]

Yes, you can report the as a substitute 1099-R for 2019 the earnings.  This amount is fully taxable on your return and you will have a 10% penalty for early withdrawal.

The Code you want to use for Box 7 is code 8.

You will receive a 1099-R in 2021 for this distribution since it occurred in 2020.  You do not need to report the information on your 2020 tax return since you have already reported it on your 2019 return.

[BluuDogg79]

So now that I create a substitute 1099-R and report these earnings on excess contributions, this bumps up my income and Turbo Tax is telling me that I'm not allowed any Roth IRA contribution at all!  So now do I have to go back to Vanguard and request a return of the remaining $500?  I feel like Turbo Tax did a very poor job explaining this situation and what I needed to do.  Very frustrating.

[BluuDogg79]

Again, no one has addressed this issue.  Turbo Tax originally said I could only contribute $500 to my Roth IRA, thus it said I had an excess distribution of $5,500.

So I withdraw the $5,500 and earnings from my Roth IRA and report those earnings on a self-created 1099-R.  Now Turbo Tax is saying I can't contribute anything to my Roth IRA!  I guess I have to go back and withdraw the remaining $500 from my Roth IRA.  Do you understand the circular nature of this?

This was not presented well in Turbo Tax and I'm still leary that I'm even handling this correctly.  

[madmanc20]

@DianeC958 

@MarilynG1 

Similar but slightly different situation for my elderly mother's (age 75) tax situation. Also need more details on how to correct Turbotax tracked basis

=== Background

- Made $7k Roth IRA contribution on 3/5/2020 for 2019 tax year

- 2019 taxes filed before 4/15/2020

- Mistakenly withdrew this $7k contribution as excess contribution on 5/27/2020 (Mistakenly thought this was 2020 Roth IRA contribution while rewinding 2020 RMD. Mother went from having earned income in 2019 to $0 in 2020)

- Withdraw was at a loss due to market condition. Custodian calculated proper amount ($6475)

Just received the 2020 1099-R for the withdraw distribution. Box 1 = $6475, Box 2a = $0, Distribution code 8J. 8 is the correct code for contribution and withdraw in the same year (in 2020 so on 2020 1099-R). P is for contribution and withdraw in different years. Here is info.

1099-R Distribution Codes 8 and P: IRA Excess Contributions/Recharacterizations | Wolters Kluwer

=== Need to figure how what to do on tax forms

Discussed with Fidelity IRA department agents. They are not tax attorney but seen many of these cases. Also did research on my own

2019 amended return

- No 6% penalty since withdraw within 6mo of 4/15/2020 tax deadline

- Need to file 2019 Amended Return by 6mo after 10/15/2020 extension deadline

- Amend 2019 with 2019 Turbotax. This entail the following

     - Put "Filed pursuant to Section 301.9100-2” on top of amended return heading

     - report any taxable earnings between contribution and withdraw ($0 since it was a loss)

     - make necessary adjustments.  Fidelity agent suggest just remove the $7k IRA contribution on the amended return

    - In turbotax, removing $7k contribution would also eliminate the added $7k for correct basis tracking after with withdraw

    - Explanation wherever amended returns requires one.

    - Since I have the 2020 1099-R showing the withdraw, will attached it as supporting evidence BUT will not enter the 1099-R into the 2019 amended return.

2020 tax return

- Include the 2020 1099-R showing the withdraw. Box 2a (taxable portion) is $0. Distribution code 8J is correct per note above

- J code requires an accompanied explanation in turbotax so just explain accordingly.

- 5329 is unnecessary as contribution was withdrawn before the 2019 tax extension filing deadline.

Thanks for any guidance in advance. So complicated as the effort straddles 2 tax year documents and potentially 2 tax year turbotax software.

[MarilynG1]

@BluuDogg79 Don't report the income for the earnings on your Excess Roth IRA Contribution with a 1099-R for 2020.  You can report them in 2021.

Just use the 1099-R to report withdrawal of Excess/Earnings before due date for 2020 return. 

Click this link for more info on Excess Contribution Earnings.