Excess IRA Contribution

[sfowjr66]

In 2021 my only income was from a  federal grant and from investments. My income was reported on 1099-G and the usual 1099-Int and 1099-Div.  I had no wages, no salary.  Being uniformed, I made an after-tax contribution to my traditional IRA, then did "back door" conversion to my Roth IRA.  Now I learn that with no 1040 line 1 earnings, this IRA contribution is not allowed.  How do I remove the excess contribution made to the IRA and converted to the Roth IRA? Thank you.

[DianeW777]

Remove the Roth IRA contribution plus earnings before the due date for your tax return which is April 18, 2022 for the 2021 tax return. The earnings will be taxable in 2021 and you will receive a Form 1099-R for 2022.

Withdraw the excess contribution and earnings: In general, you can avoid the 6% penalty if you withdraw the extra contribution and any earnings before your tax deadline. You must declare the earnings as income on your taxes. Also, you may owe a 10% tax for early withdrawal on the earnings if you're younger than 59½.

It's quite likely you will receive a Form 1099-R in 2022 if you actually removed the excess in 2022 before filing your 2021 tax return. You must report those earnings in 2021 (with or without a Form 1099-R). Use code 8, in Box 7. Create a Form 1099-R in your 2021 return.

• 8 – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2021

Next year, when you receive the Form 1099-R for this same distribution, there should be a code P, which will show that the distribution was already included and taxed in your 2021 tax return. The result should be nothing taxable in 2022.

• P – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2021 (it will be changed from 2020 to 2021 for 2022 tax year

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).

Wages, salaries, etc.

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

Commissions.

An amount you receive that is a percentage of profits or sales price is compensation.

Self-employment income.

If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and

• The deduction allowed for the deductible part of your self-employment taxes.

Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs.  All of this information can be reviewed in IRS Publication 590a.  See the image below.

[sfowjr66]

Thank you for your thoughtful and helpful response.

[sfowjr66]

My earnings are for a post doc fellowship stipend.  Earnings are reported on 1099-G. I think current law permits me to report this as taxable income.  If I do that using Misc 1099 form on Turbo Tax, the stipend amount appears on line 1 of the 1040 form which then permits me to make traditional IRA contribution followed by back door Roth IRA conversion.  If I do this, what do I do to show that the amount reported on 1099-G has been "re-characterized" as "Misc income"?

I appreciate your thoughts about this.  Thank you.

[RobertB4444]

@sfowjr66  You will have told the IRS this is earnings applicable to contributing to an IRA by entering the income as 'Other earned income.'

To report your stipend income:

• Go to Federal Taxes>   Wages and Income
• Scroll to the Less Common Income section and choose Miscellaneous Income (the last choice) 
• Choose Other income not already reported on a Form W-2 or Form 1099
•  Answer Yes on the Other Wages Received screen
• Continue past Wages Earned as a Household Employee and Sick or Disability Pay
•  Answer Yes on the Any Other Earned Income screen
•  Choose Other on the Enter Source of Other Earned Income screen
•   Enter your stipend information on the Any Other Earned Income screen.

This will report your stipend on line 8 of your Form 1040, and you will not be subject to Self-Employment Tax.

[sfowjr66]

Thanks very much.  One other question.   What do I do when Turbotax asks if I received a 1099-G (which I did)? The IRS will receive the 1099-G from my employer--won't they then look for a 1099-G in the return I file?

Regards.

[FangxiaL]

I wonder if you can just enter the 1099-G as a 1099-G form into TurboTax in the Other Common Income section. "...For tax years beginning after 2019 taxable non-tuition fellowship and stipend payments are treated as taxable compensation for the purpose of IRA contributions. These will include any amounts included in your gross income and paid to you to aid you in the pursuit of graduate or postdoc study."

@sfowjr66