Excess Roth contribution and withdrawal, extending back a few years to 2019

[Oldblue]

In early 2020, I made a contribution to my IRA, which was inadvertently put into 2019 Roth IRA as prior year, i.e. 2019 as I had not made a 2019 contribution. Again in 2021, I made a contribution which went into the right year, i.e. the current year  2021.

I have subsequently realized that both these should have been to Traditional IRA and not ROTH due to earnings limits and as such ROTH contributions are excess or not allowed in my case.

I understand that I have until I file 2021 taxes to withdraw or recharacterize the 2021 payment, but it is too late late to withdraw the 2019 ( which was a. should have been in IRA and b. should have been for 2020), so I owe penalties. 

To correct this, I have recently withdrawn both contributions based on my understanding that 2021 can be withdrawn up to and prior to me filing taxes without penalty, but 2019 will incur penalties at 6% per year. I am over 59 1/2, and would have been in 2019 as well, so I don't think the 10% applies to me. 

My questions are:

Do I need to file 2019 amendment first before filing 2021?  I do not have a 1099-R as this was only withdrawn in the last couple of weeks prior to filing taxes this year. 

For current 2021, how do I account for the withdrawal of the current $7000, and how do I account for the 2019 now? Do I check yes for did I "make a Roth IRA contribution for 2021?" 

Under next question in interview " Excess Roth Contribution for prior years", is this where I put in the 2019 amount or is this taken care of by filing a 2019 amended return? 

Subsequent questions ask if I am withdrawing current year's excess, by due date of my return, so I believe this takes care of the current withdrawal ( I did not recharacterize, I simply withdrew it as I was not not given the guidance to possibly recharacterize until AFTER I had withdrawn). 

Are my assumptions correct, if not, how do I approach this in Turbo Tax this year? 

Thanks,

[DanaB27 · Accepted solution]

No, you do not need to wait until you filed your amended 2019 return.

Yes, you will enter the 2021 Roth contribution and the 2019 excess in the IRA contribution interview.

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 2019.
6. On the penalty screen enter the 2021 contribution amount as withdrawn (without earnings and losses) by the due date. Then TurboTax will only calculate the 6% penalty for 2019 excess.

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of the 2021 excess Roth contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 2022 Form 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 Form 1099-R into the 2022 tax return since the withholdings are reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 1099-R in your 2021 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 2021?"
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 2022 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 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

For the 2019 excess contribution, you will have to pay the 6 % penalty for 2019, 2020, and 2021. You can request a regular distribution (without earnings and losses) because it is after the due date of the 2019 return. You will have to amend your 2019 and 2020 tax returns.

[Oldblue]

Thanks for the guidance. I will follow the instructions.

Does Form 5329 need to be filled out instead of amending the 2019 return, or as well as amending the return/s? The letter I received from Fidelity references this form.

[DanaB27]

You will need to file an amendment (Form 1040-X) to include Form 5329.

[Oldblue]

Thank you. I followed the directions you gave and was able to work through this successfully. Info on creating the1009-R with the correct codes ( P and J ) was really clear and helpful. 

Much appreciated! 

Oddly when I went back to my 2019 Turbo Tax file and ran the "Amend" function to follow the process, and then I cancelled, as I was not sure I had done something correctly ( the penalties and tax was much greater than what the 2021 return was showing... by a factor of 3)  the 2019 return no longer showed the same dollar figures as it started with and unfortunately, it did an auto save, so I am now wondering if something else triggered or was captured incorrectly on 2019. 

It had auto saved before I could back out, so now I need to review that before proceeding again.

At least I am now ready to file this year's return and feel confident thanks to your help.