Fix excess Roth IRA contribution 2020: using both recharacterization AND timely removing excess before tax filing

[DanaB27]

Yes, if you recharacterized the 2020 contribution in 2021 then you will get the 2021 1099-R in 2022 with code R. You can ignore the 1099-R with code R, since you reported the recharacterization on your 2020 return. The 1099-R with code R will do nothing on your return, you can only report the recharacterization as mentioned above.

@kvkeee

[SLYKTAX]

I asked the following questions and got half answered by someone earlier.  As I am trying to file my 2020 before May 17, I need someone to help. Here are the questions.

My AGI is over the limit. I have my 2020 ROTH contribution return with gain.  Since I won't be getting a 1099-R until January or February next year.  I am now creating a substitute 1099-R for my 2020 tax return according to DianeC958’s instruction. 

 I am 70, so what is the code for the Box  7?   I had a guy from Schwab said PJ.  Doesn't look like it.  P is Return of contribution taxable in 2019 - but mine is taxable 2020.  And J is early distribution which I believe is for those under 59 1/2 and subject to 6% penalty. 

My wife also contributed to her 2020 ROTH and was also returned. She made $5,000 contribution in 2020 and $2000 in 2/1/2021. Schwab said the earning for $5000 contribution is to be reported in 2020 Tax Return only.   As it takes days for Schwab to respond to a question. Another guy I talked to didn't understand the split. 

So the question on my wife’s 1099-R is: The total earing given is $514.30.  That means the Total Return Distribution with gain made this year is $7,514.30.  I split the earing by proportion.  That is earning for 2020 & 2021 are  $367.36 and $146.94 respectively.

So for her substitute  2020 1099-R which I am creating  :  Is Box 1, Gross distribution $7,7514.30 or $5,367.36 or $5,514.30?  As I believe Box 2  Taxable Amount is $367.36 as $146.94 is for 2021 Tax Return.  Please advise.

[DanaB27]

Yes, it will be code PJ for the 1099-R since it isn't a qualified distribution but you are able to enter the age exception during the interview to avoid the 10% early withdrawal penalty. Also, on a 2021 1099-R  code P would mean taxable in 2020. TurboTax will ask after you enter the 1099-R what year it says on the 1099-R.

1. Click on the "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Answer "Yes" to "Did you get a 1099-R in 2020?"
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2a enter the earnings
7. Box 7 enter P and J 
8. Click "Continue"
9. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
10. After you enter all 1099-Rs on the "Your 1099-R Entries" screen click "continue"
11. On the screen "Did you use your IRA to pay for any of these expenses" use "another reason" and enter the taxable amount from box 2a.

A contribution made in 2021 for 2020 is deemed to be have made on the last day of 2020 and therefore all earnings from a withdrawal of excess contribution should be reported on the 2020 tax return. 

@SLYKTAX 

[SLYKTAX]

Thanks Dana for the answer and steps to do the 1099-R.

[SLYKTAX]

So, I will create two 2021 1099-R one for myself and another for my wife with TurboTax.  After creating them, will TT automatically insert the numbers from the 1099-Rs into my 1040-SR Line 4a & Line 4b or I have to do it manually?

[DanaB27]

Correct, TurboTax will automatically carry the correct amounts to line 4a and 4b after you enter the 1099-R information and answer the follow-up questions during the interview.

@SLYKTAX

[SLYKTAX]

I forgot to ask the 1099-R I created for return of my 2020 Roth contribution done in 2021 is for 2021 1099-R or 2020 1099-R?

[DanaB27]

You will select it is a 2021 1099-R when TurboTax asks.

[bgal]

Hi,

I was doing my 2021 taxes and found out in the process that I made an excess contribution in 2020 for my ROTH IRA because I got married that year and filed "married filing separately".  On my 2021 taxes, there is a question asking if I made an excess contribution prior to 2021 and I noted yes and the amount.  Now, I see a decrease in my tax return.  Is this the 6% penalty>

Also, when I take those funds and recharacterize them into a traditional IRA, does that count as a 2021 trad IRA contribution or a 2020 contribution, or none at all?  
Do I need to do anything else?  Please help.  

[DanaB27]

You can only recharacterize your 2021 contribution until the due date of the 2021 return. You cannot recharacterize your 2020 contribution because the due date has passed.

You will have to pay the 6% penalty for 2020 and 2021 since you haven’t removed the excess by December 31, 2021.  You seemed to have entered the correct information on your 2021 tax return since you are seeing the penalty.

To remove the 2020 excess contribution and avoid further penalties you will take a regular distribution (without earnings) by December 31, 2022 since it is after the due date of the 2020 tax return. This distribution will be reported on your 2022 tax return but will not be taxable since you are withdrawing a Roth contribution.

@bgal

[bgal]

Can I amend my 2020 tax return and re-file jointly, instead, to avoid all the investment recharacterization and penalties?  Is this a complete solution?

[dmertz]

If you both agree, you can amend from separate to joint, giving you a much higher phase-out threshold.