Excess Contribution to Roth IRA

[samsm2023]

Hello,

I did not realize I would make as much as I did in 2022, so my MAGI resulted in an excess contribution. I maxed out the full $6,000, and I was unaware this was a thing. When doing my taxes, I was notified of it. I contacted Fidelity and spoke with an advisor about my options. I chose to carry it over and apply it to my 2023 IRA contributions. Now, I am stuck on how to proceed/what to fill out when completing the section within TurboTax. Will I have to pay the penalty then receive a form to complete with my 2023 taxes next year? Can it all be handled with my taxes this year so this does not loom over me? What is the best way to go about this to get this situated?

[DanaB27]

Yes, you can apply the excess to 2023 if you know that you will be able to make the contribution for 2023. Your financial institution doesn't have to do anything, you will just leave the contribution in the account. You use your 2023 tax return to apply the excess as a 2023 contribution. You will have to pay the 6% excess contribution penalty for 2022.

On your 2022 tax return:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA” and enter your Roth contribution
5. Continue through the interview and TurboTax will create Form 5329 to calculate the 6% penalty.

To apply the excess as a 2023 contribution on your 2023 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022 (if it wasn't carried over).
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023.

Please see What happens if I made an excess Roth IRA contribution for additional information.

[samsm2023]

Fidelity had me fill out a return of excess form where they just moved the excess to 2023 (as advised by a fidelity advisor). I am assuming that is fine and I can just proceed as you had mentioned, correct? TurboTax will handle the rest in regards to me paying the penalty and completing form 5329?

[DanaB27]

Then you won't apply the excess on your 2023 return because you have already removed it. You won't pay the 6% penalty. Please enter at the end of the contribution interview on the penalty screen that you withdrew the excess contribution of $6,000 to avoid calculating the 6% penalty.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings (you can verify this with your advisor). This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 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 2022?"
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 2023 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 "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

[fanfare]

If you can't find a way to have TurboTax add the excess earnings now, (boo on TurboTax)

you can e-file and then amend your return.

your 1040-X AGI will go up by the amount of the earnings.

the earnings are an early withdrawal if you are under age 59 1/2.

You either amend this year without a 1099-R  or next year with a 1099-R, besides figuring how to deal with TurboTax,  it's all the same.

you know the earnings amount because the custodian adds it on to your returned money.

there will not be any withholding unless the custodian does it wrong.

Important: if you amend this year, you can e-File 1040-X. next year, it will be on paper.

@samsm2023 

[fanfare]

If you can't get the extra earnings on this 1040 then I suppose you can't get the earnings on 1040-X either.

SO, I guess you'll have to ignore my suggestion above.

maybe you can figure it out.

@samsm2023