Fixing Excess Roth IRA Contribution from Prior Year

[sp38]

I made a $6k Roth IRA contribution in 2021. I then had unanticipated income in 2021 which made me ineligible from contributing any money to a Roth IRA that year. I realized this while filling my taxes in Feb 2022 and submitted forms with my brokerage (Schwab) to remove the excess contribution. Although I had originally contributed $6k to my Roth IRA, stock market performance brought the amount in my Roth IRA account down to $4.5k as per calculations done by Schawb when I requested the removal of my excess contribution. Schwab withdrew the $4.5k amount in Apr 2022. I did not receive any forms specific to this withdrawal for the year 2021. I had previously been provided with Form 5498 for 2021, which listed the $6k amount. Schwab also provided me with a 1099-R form for 2022, which indicates the $4.5k amount as the gross distribution.

I then filed my 2021 taxes in June 2022 (I had requested a tax extension).

While working through my 2022 taxes this year, I am doubting whether my 2021 tax return was filed correctly. 

Questions: Was my 2021 tax return incorrect? If it was incorrect, do I need to file an amendment for 2021?

Do I need to report the loss of $1.5k from my 2021 Roth IRA?

Is there a special step I should take when filing my 2022 taxes? (I have not submitted my 2022 tax return yet - I am located in CA and our tax deadline was extended until October).

Thank you in advance for your insights!

[Opus 17]

If you removed the excess before the deadline, you should not have reported an excess on your 2021 tax return.  You should not have a form 5329 as part of your 2021 return that calculates a penalty.

That's all you need to do.  If there were gains, they would be taxable and be subject to a 10% penalty for early withdrawal, but since you had a loss, you don't have anything further to report.

No, you can't take any kind of deduction for the $1500 loss in the Roth IRA, IRAs work differently than regular investments.

It sounds like everything was correct and you don't need to do anything special for 2022.  Do you have a more specific concern?

[sp38]

Thank you. I will review and update with a follow up question.

[sp38]

While I did not have a Form 5329 for 2021, I did have a Form 5498 for 2021 which reported the $6k Roth IRA contribution for 2021.

My 1099-R for 2022 lists the gross distribution (box 1) as $4.5k, the taxable amount (box 2a) as 0, and I have Distribution codes (box 7) P & J. The rest of the boxes are empty/nothing else is checked.

While filling out my 2022 tax forms, TurboTax prompted me to file an amendment for 2021, so I may have inputted something incorrectly. I am attempting it again. Here are the relevant pieces of information I have now inputted in TurboTax:

Documents Imported - I imported my Schwab 1099-R which lists $4.5k

Retirement Plans and Social Security section - lists the $4.5k from Schwab 1099-R

Retirement and Investments section - I am listing that I will be contributing $6k to my Roth IRA for 2022

“Do you have any excess Roth contributions? Tell us if you contributed more to a Roth IRA than was allowed in 2022 or any previous year.” - Should I list the $6k excess from 2021 here?

“Contributions Withdrawn Before the Due Date. Enter any contribution that you withdrew before April 18, 2023.” - Should this be listed as $6k for the amount I contributed to my Roth IRA for 2021? Or listed as the amount actually withdraw post-loss, $4.5k?

[dmertz]

"While filling out my 2022 tax forms, TurboTax prompted me to file an amendment for 2021"

This is simply a reminder that your 2021 tax return should have reflected the fact that excess contribution was returned before the due date of the 2021 tax return.  Your 2021 tax return already reflects that by the fact that it included no Form 5329 and that there were no taxable gains attributable to the $6,000 contribution that was returned (because there was instead a loss which is not reportable).  (Your 2021 tax return should also have included an explanation statement regarding the return of contribution.  If it didn't you can just provide explanation if and when the IRS questions the excess Roth IRA contribution.)

Because you properly corrected the excess contribution before the due date of your 2021 tax return, you have no excess contribution carried into 2022 to enter into 2022 TurboTax.

[Opus 17]

@sp38 

Form 5498 is not part of your tax return, it is provided by the IRA custodian, and reflects what you actually contributed in 2021.  The custodian must report your contributions as made, they can't "net out" the corrective withdrawal.  

When the IRS reviews your account, they will see (1) a 2021 contribution, (2) a 2021 tax return with a level of income that makes you ineligible to contribute, and (3) a 2022 distribution with code P.  That should be enough for them to figure out what you did.  At worst, they may send a letter asking you to provide more details about the missing $1500.

"“Do you have any excess Roth contributions? Tell us if you contributed more to a Roth IRA than was allowed in 2022 or any previous year.” - Should I list the $6k excess from 2021 here?"

No, because you removed it.

"“Contributions Withdrawn Before the Due Date. Enter any contribution that you withdrew before April 18, 2023.” - Should this be listed as $6k for the amount I contributed to my Roth IRA for 2021? Or listed as the amount actually withdraw post-loss, $4.5k?"

No. This is asking about excess 2022 contributions withdrawn before April 2023, it is not asking about excess contributions from 2021 that were withdrawn before April 2022.  If your income for 2022 is low enough that you are still eligible for the $6000 contribution, you have no excess to remove for 2022.

You already dealt with 2021 correctly on your 2021 return.  There is nothing to correct for 2021 and you have no special circumstances that require reporting or adjusting on your 2022 return.