Excess Roth IRA contributions since inception

[ETFtrader]

I discovered that my wife had set up a Roth IRA account in 2021 and has been making contributions for the last 4 years (2021, 2022, 2023 and 2024). Unfortunately, she failed to realize that due to the MAGI limit she did not qualify to make a Roth IRA contribution in any of those years. So the Roth IRA needs to be unwound and tax penalties paid. She's under 59 1/2 yrs old. I am using the desktop version of TurboTax and have all prior years installed on my computer.

I've read through the forums and think I have the solution for our fact pattern but I have some questions.

Roth IRA contributions and details:
2021 $6000 contribution
2022 $6000 contribution
2023 $6000 contribution
2024 $7000 contribution
Total Contributions in Account: $25,000
Account Balance as of 12/31/2024: $32,500 (difference of $7500 is investment earnings/gains)
Account Balance as of February 2025: $33,000 ($500 in investment earnings/gains since 12/31/2024)

No funds have been distributed from the financial institution as of yet. So need advice on that as well as the TurboTax steps. The 1099-R's are also of concern.

What I think needs to happen based on my TurboTax community research (with questions on #5 and #8):
1. Amend our 2021 tax return and report excess contribution of $6,000 on Form 5329, with penalty computed at 6% of $6,000. TurboTax will generate the 5329 and the 1040-X that I will need to file.

2. Amend our 2022 tax return and report excess contribution of $6,000 and prior year excess contribution of $6,000 thats still in the account on Form 5329 with penalty computed at 6% of $12,000. TurboTax will generate the 5329 and the 1040-X that I will need to file.

3. Amend our 2023 tax return and report excess contributions of $6,000 and prior years excess contribution of $12,000 that is still in the account on Form 5329 with penalty computed at 6% of $18,000. TurboTax will generate the 5329 and the 1040-X that I will need to file.

4. Prepare our 2024 return and report prior year's excess contributions of $18,000 on Form 5329 with penalty computed at 6% of $18,000. Also report the $7000 of excess contribution made in 2024, but that it's been reversed. I've read that we can avoid a penalty on the 2024 contribution amount of $7,000 by making a "corrective distribution" before April 15, 2025. See #7 below.

5. On the 2024 tax return report the $7,500 in Roth IRA gains/earnings on Form 5329. Those earnings will also appear on 1040 Line 4b as ordinary income. In TurboTax manually prepare a 2025 form 1099-R in expectation of that the 1099-R that the financial institution will send in early 2026 (for tax year 2025). This 1099-R will have codes P&J. When the 1099 arrives from the financial institution in 2026 we can ignore it since we have already submitted it as part of our 2024 tax return filing. Alternatively, we could wait until the financial institution issues the 1099-R in early 2026 (for tax year 2025), and then amend our 2024 tax return at that time. **Not sure if this is correct or not.**

6. Request financial institution to distribute the $18,000 in excess contributions from 2021-2023 (with no earnings or gains included), with expectation they will issue a 2025 1099-R with code J. Use this 1099-R to eliminate the excess contribution on the 2025 tax return so no penalty will be owed in 2025.

7. Request financial institution to make a "corrective distribution" of the 2024 contribution amount, including earnings as of 12/31/2024 (so  $7000 contribution + $7500 earnings), with the expectation they will issue a tax year 2025 1099-R with code J (for $7000 contribution) and Code P (for the $7500 earnings/gains).

8. Request financial institution to distribute the remainder of the Roth IRA account balance (any earnings between Dec 31, 2024 and when the distribution occurs prior to April 15, 2025). This will get reported on a 2025 1099-R with a code P. This will get captured on Form 5329 and 1040 Line 4b as ordinary income when we file our 2025 tax return. **Not sure if this is correct or not.**

Thanks for your assistance!

[DanaB27]

1. Yes, that is correct.

2. Yes, that is correct.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter Roth IRA contribution
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 ($6,000)

3. Yes, that is correct.

4. Yes, that is correct.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter the Roth IRA contribution for 2024 ($7,000)
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution of $18,000
7. On the penalty screen enter the excess contribution amount of $7,000 withdrawn by the due date.

5. Yes, if you made an excess contribution in 2024 and withdrew the 2024 excess Roth IRA contribution plus earnings in 2025 before the due date, then you will get a 2025 Form 1099-R in 2026 with codes P and J. This 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 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 2025 Form 1099-R into the 2025 tax return since the withholdings are reported in the year that the tax was withheld. The 2025 code P will not do anything to your income to the 2025 tax return income but the withholdings will be applied to 2025.

To create a Form 1099-R in your 2024 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 2024?"
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 "Is the IRA/SEP/SIMPLE box on this 1099-R checked?" screen answer "No, the box is blank"?
11. On the "Which year on Form 1099-R" screen say that this is a 2025 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024

6. Yes, you will request a regular distribution of $18,000 (without earnings). You will get a 2025 Form 1099-R with code J. This distribution will be reported next year on your 2025 tax return and will resolve the excess and you no longer pay the 6% penalty. When TurboTax asks about net contributions prior to 2025 you will include the $18,000 excess contributions in the net contribution amount.

7. Yes, you will request the withdrawal of an excess contribution plus earnings for the 2024 excess contribution. The financial institution should be able to calculate the earnings. If these were contributions made in 2024 then you will get a 2025 Form 1099-R with codes P and J, box 1 showing the whole distribution (excess plus earning) and box 2a showing the earnings.   

8. No, after taking out the $18,000 as a regular distribution and removing the 2024 excess plus earnings you can keep the account open. You are not required to close the account or remove the rest of the funds.

Please see How do I amend my federal tax return for a prior year?

[ETFtrader]

Thank you @DanaB27 ! 

I used your information from an answer you posted a few years ago in order compile my steps, super helpful!

If I opt to wait until next year to amend the 2024 return using the actual 2025 1099-R (for the 2024 excess contribution and earnings) from the financial institution, I assume IRS late payment interest charges will continue to accrue? If that's the case, then I defintely want to manually input the 1099-R now and report it on our 2024 return to avoid those charges.

On that topic, I am fully expecting the IRS to bill for accrued interest from 2021-2024 on the late payment of the 6% penalty. Is that reasonable to assume?

I just hope the financial institution will provide me with all the details I need to manually create the 1099 in TurboTax, like their mailing address, phone number and TIN. The TIN is the most critical, correct?

Lastly, regarding #8, it sounds like if we leave any remaining balance in the account after all the distirbutions are made (all excess contributions and earnings through tax year 2024) there won't be any tax issue. I assume that when the amounts are withdrawn at some point in the future it would show up on a 1099-R and be considered taxable earnings but no penalties or late payment interests would apply?

[DanaB27]

Yes, it would be better to add a 2025 Form 1099-R now to avoid any potential charges.

Yes, the IRS will bill you for the accrued interest from 2021-2024 on the late payment of the 6% penalty.

Yes, the financial institute should be able to provide you with all the information.  Yes, it is important that you get the TIN information.

Yes, you can leave the remaining balance in the account. Yes, when the funds are withdrawn before 59 1/2 they would be taxable income since only the earnings are left in the account. The 10% early withdraw penalty would apply on the taxable amount. 

If you withdraw the funds after 59 1/12 then these would be Qualified Distributions and not taxable.

[ETFtrader]

When I went to amend my 2023 return (Premier, desktop version), I could not get access to the IRA Contributions screen to make my corrections.

When using search function and I type in "IRA Contributions" it does not provide a Jump link. All it shows is links to web pages for support. How can I get to the section inside TurboTax for inputting the excess Roth IRA contribution?

Thanks!

[DanaB27]

Please try these instructions to get to the IRA contribution section:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start/Edit”

@ETFtrader 

[ETFtrader]

Thank you @DanaB27 that worked! 🙂

A couple things I am curious about regarding the amendments and manual filing process:

1) Each amendment is about 34-38 pages long, which includes the 5329, 1040X and the related 1040 and schedules. Does all that get sent to the IRS along with payment, or just forms 5329 and 1040X? I gather I need to send all of the forms.

2) Since I am amending 3 years, with penalty payments associated with each, when I mail this to the IRS  should I mail them all together in one envelope (108 pages plus 3 payment checks) or mail each amendment (and each payment) in separate envelopes? I'm not sure what the best practice is here. 

Thanks again!

[DanaB27]

1. Generally, you only need to send the 1040-X and any forms that changed (which should be Form5329 and Schedule 2).

2. It is best to mail each amendment in a separate envelope.   

[ETFtrader]

@DanaB27 One thing I am curious about, when the 1099-R from the financial institution gets generated (and the one I am preparing in TurboTax for 2024 to reverse the 2024 excess contribution) and it has a code J , won't this trigger an IRS inquiry since code J is for an Early Distribution from a Roth IRA which normally would be subject to a 10% penalty?

Is there a place in the tax return to explain that the code J 1099-R distributions are the return of excess contributions and NOT an early distribution subject to the 10% penalty? Or do we just have to wait until the IRS makes the inquiry and then explain it at that point? 

[DanaB27]

You explained it already by entering earnings under "Corrective distributions made before the due date of the return" on the "Did you use your IRA to pay for any of these expenses?" screen. This will put code 21 on line 2 of Form 5329: "Corrective distributions of the income on excess contributions distributed before the due date of the tax return (including extensions)."

Also, when you enter Form 1099-R with code PJ TurboTax will ask you to fill out the explanation statement. 

@ETFtrader 

[ETFtrader]

@DanaB27  Thanks, I see the code 21 on Form 5329 in Turbotax. That makes sense for the 2024 tax year filing as it relates to distribution of the 2024 excess contribution and all Roth IRA earnings through 12/31/2024, but what happens in 2025?

In 2025 I will get a 1099-R for the excess contributions that were made in years 2021-2023 ($18,000) that I am instructing the financial institution to distribute separately from the 2024 contribution + earnings distribution. Will this get reported in the 2025 return form 5329 with a code 21?

I looked at the available codes in the Form 5329 instructions and I don't see any code that relates to "return of original Roth IRA contribution from financial institution".  Since its a "corrective distribution" and not an "early withdrawal of Roth IRA before age 591/2" I hoped to avoid the 10% early withdrawal penalty or is that impossible?

Thanks for your help!

[DanaB27]

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. 

You are withdrawing only your contributions and therefore it won't be taxable and is not subject to the 10% penalty. When you take an early nonqualified distribution from a Roth IRA you will report this on Form 8606 part III. 

Next year in TurboTax when you get the 2025 Form 1099-R with code J for the $18,000 distribution you will follow these steps:

1. Click on "Search" on the top and type “1099-R” 
2. Click on “Jump to 1099-R” and enter all your 1099-Rs
3. Click "Continue" on the "Review your 1099-R info" screen after you added all you Form 1099-R
4. Answer "Owned Any Roth IRA for Five Years?" screen
5. Continue through the questions and make sure you enter the net contributions prior to 2025 on the "Enter Prior Year Roth IRA Contributions" screen (you will include the excess contribution amount from 2021 - 2023).

@ETFtrader 

[ETFtrader]

@DanaB27 One last point of clarification, in my first post regarding the two separate distributions that I need to request from the financial institution (item #6 and #7 above): Should I be expecting TWO separate 2025 tax year 1099-R's in 2026 reflecting those distributions or will all distributions be combined into ONE 1099-R?  I am pretty sure the financial institution will only generate one 1099-R for the account per tax year and all distributions will be combined. If that is the case, will this impact my 2024 or 2025 tax return? Maybe the 1099-R will separate out the two distributions?

[DanaB27]

You should get two 2025 Form 1099-R. One for the 2024 excess plus earnings with code PJ and one for the return of the 2021-2023 excess without earnings with code J. 

[ETFtrader]

@DanaB27 In looking at the 1099-R inside TurboTax for the 2024 tax return I noticed that in the step-by-step that the box 7 code P said "Return of contribution taxable  in 2023" which I am not sure is correct. When I pull up the 1099-R form its a 2024 1099-R form, but the box in line A5 under "Verify Box 7 Distribution Codes" is checked. Line A5 box "Check box if there is a code P or R in box 7 and this is a year 2025 Form 1099-R".

I just want to make sure the 1099-R is set up correctly before I file.