How do I report a withdrawal of an excess 2020 Roth IRA contribution that resulted in a net loss? Contributed $7000 in Feb 2021, total amount returned was $6895.95 in March 2021

[renaissancegrrrl]

In February 2021 I made a Roth contribution of $7000 for tax year 2020. I subsequently found that the whole contribution was not allowed due to MFS filing status. I asked the custodian to do a corrective distribution, and they returned $6895.95 (market had dipped in the intervening month).

I did not report anything on my 2020 return. I eventually received a 5498 for tax year 2020 showing the $7,000 Roth contribution, and a 1099-R for tax year 2021 showing the $6895.95 distribution on line 1 (code 8, J), with a taxable amount of 0 on line 2a.

Do I need to amend my 2020 return? Do I need to report anything on my 2021 return? Thank you!

[DavidD66]

No, you are only required to withdraw the contribution amount plus any gain, or less any loss attributable to that contribution.

[renaissancegrrrl]

Thanks, can I ask for a bit more clarification? It sounds like you are saying I do not need to enter anything at all into TurboTax regarding this excess contribution and withdrawal, as there were no earnings and the entire excess amount was withdrawn before the filing deadline. Is that right?

[DanaB27]

Yes, if you didn't enter the contribution on your 2020 tax return and had no 6% excess contribution penalty calculated then you do not need to amend your 2020 tax return.

Your Form should have had codes P and J because it was for a 2020 contribution and should have been included on your 2020 tax return but since you do not have earnings it won't matter. The Form 1099-R won't be taxable since you had no earnings. You can ignore it but keep it for your records.

[dmertz · Accepted solution]

At this point there is nothing to do except be prepared to provide explanation if the IRS ever questions the contribution and its return.

In 2020 TurboTax you should have entered the Roth IRA contribution, indicated that you had it returned, then when prompted by TurboTax, prepared an explanation statement indicating that you originally contributed $7000 on whatever date in 2021 that occurred and that, because the value of the Roth IRA had dropped, the adjusted amount distributed was $6,895.95 on whatever date that occurred in 2021.

Assuming that there is no tax withholding shown on the Form 1099-R, you can ignore it.  Make sure to retain this form since it shows $0 in box 2a which will help substantiate your assertion that there was a drop in the value of the Roth IRA.