Excess Roth IRA contribution made in 2017 and withdrawn before filing in 2018. When and how do I pay taxes on any earnings?

[starbase1999]

However, the amount we can contribute to the Roth is based on earned income. I don’t think that anything else contributes to that number. Certainly not interest, dividends, capital gains or any earnings the Roth may have earned. That’s why I don’t think MAGI is an issue. The form that is related to the TurboTax screen to determine excess contributions I believe just shows that earned income.

[macuser_22]

Excess contributions are both.  You must have at least as much earned compensation as the total IRA contribution or it is excess AND your MAGI cannot exceed the limits.  I have been assuming that you have sufficient income to make the contributions but it is your high income that is limiting it.  Perhaps I assumed incorrectly.

"Certainly not interest, dividends, capital gains or any earnings the Roth may have earned. " Yes all of those are part of your MAGI and must be considered.

MAGI is Modified AGI.  The Roth contribution limit is biased on AGI Modified by adding other income to it.  AGI is all income, not just earned income.  Any IRA taxable income on line 15b is added to the AGI, which in turn will increase the MAGI which in turn further limits the Roth contribution limit leading to a endless decreasing loop.

MAGI is what determines the contribution limit - not earned income unless you do not have sufficient income to make a contribution.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017">ht...>

See IRS Pub 590A for MAGI
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590a#en_US_2016_publink1000230985">https://www.irs.gov/publication...>

[macuser_22]

Above comment edited to add information.

[starbase1999]

Yes, your assumptions are off. I just retired so for 2017, my earned income is low and so is my MAGI. My MAGI is well below $100k for joint and well within the limit to be able to make the max contribution. In this case, I’m only concerned that the earned income was lower than our contributions. So, you’re right that when our MAGI is high and close to the upper limit, even though the earned income may be low, we have to look at the amount that the 1099-R may increase the MAGI. At any rate, TurboTax should tel, us if that maximum contribution is exceeded after entering the 1099-R information.

[macuser_22]

Right.  When you have all the information TurboTax should tell the story.    Not all forms are ready final yet - most will be by Jan 18.

[starbase1999]

I entered the 1099-R information.  I called the financial to verify their federal identification number.  I also asked for verification on the two codes P and J.  They were hesitant to guarantee that those would be the codes but said they will probably be the codes.

As expected, my tax refund remains the same.  I also notice that form 5329 is generated too. As you said, since the forms are not final yet, both 1040 and 5329 are shown as errors for that reason.

[dmertz]

If the codes are NOT [typo corrected] P and J, they have made a mistake in the handling of this situation.  You likely won't get the 2018 Form 1099-R for at least a year, so it have been more helpful if they could give you a more definitive answer on what the details of the 2018 Form 1099-R will be as confirmation that they've handled things correctly.

If you were over age 59½ at the time of the distribution, you'll need to claim a code 12 "Other reason" exception [on Form 5329] to the early-distribution penalty indicated by the required code J.

[starbase1999]

They said they couldn't guarantee the codes since the transaction hasn't happened yet and the form has not been generated.

1099-R has no code 12.  You had told me P and J.  The financial had told me P and J.  Some websites I had gone to say P and J - "Roth IRA - Excess contribution removed in year following contribution year (by applicable tax return due date)".

I did as you suggested "If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings." So my taxes were not affected.

[macuser_22]

The "Other Reason" exception on the 5329 form is a code "12", which was what user dmertz was referring to, not the 1099-R code.   

The 1099-R code "P" on a 2018 1099-R says that it is a return of contribution taxable in 2017.
The 1099-R code "J" says that it is a Roth IRA.

[starbase1999]

I didn't read that dmetz was suggesting code 12.  I thought it was macuser_22.
He threw me off in saying that codes P and J are wrong.
I don't see where to enter code 12 in form 5329.

In speaking to the financial again, they said it was probably be code 8
Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2017
They said code J is early distribution from a Roth IRA is for someone under 59 1/2 (I'm over 59 1/2).
They said code P is return of contributions for 2016

They said that there would be a code reason(s) on my transaction history after the transaction is made.  He said I should be able to match the words to the code at that time.

So, I know that you really know your stuff and I trust in the codes you told me.  Could you just weigh i on who is correct about the codes?

[dmertz]

Nobody here said [or at least didn't intend to say] that the codes on the 2018 Form 1099-R should be anything other than P and J. [I'm sorry I made a typo that suggested otherwise, now corrected.] Whoever you last talked to at the financial institution is wrong about code 8 being the code to expect; they were blindly reading from the instructions for a 2017 Form 1099-R rather than the yet-to-be-released instructions for the 2018 Form 1099-R that you will receive. The 2018 instructions will say that code P means taxable in 2017 (which is correct for your situation) and that code 8 means taxable in 2018 (which is incorrect for your situation).

[macuser_22]

I believe dmertz has a typo - he said "If the codes are on P and J..."  I think he meant to say "If the codes are NOT P and J...".

Codes J & P are correct for a contribution made *in* 2017 regardless of the year returned.  Code 8" would only be for a contribution made *in* 2018 and returned inn 2018.

As I said in my answer above, the code P on a *2017* 1099-R would be for 2016, on a *2018* 1099-R, which is what you will receive, the code P means 2017.  That is why TurboTax will ask if it is a 2017 or 2018 1099-R - you choose 2018.  The year advances by one each year on the new 1099-R for that year.

The code 12 on form 5329 should be the code in line 2 on the form.

[dmertz]

I've corrected the typo where I typed "on" instead of "NOT."  Sorry for the confusion.

[starbase1999]

Wow, I really got confused and rattled but the lack of the word NOT.
All is forgiven.
I reverted back to P and J.  
Macuser_22, thanks for the explanation of why the financial was confused about the codes.

I see the code 12 automatically populated in line 2 of form 5329.  I see it's because of the Other condition which must have been generated from the TurboTax questions I was answering.  The 5329 instructions indicate many conditions for the Other but the relevant one seems to be "Distributions incorrectly indicated as early distributions by code 1, J, or S in box 7 of Form 1099-R. Include on line 2 the amount you received when you were age 59 1/2 or older."

Once again, thanks for guiding me through this labyrinth.

[macuser_22]

Sounds like you got it right.