How to enter excess traditional IRA contribution rolled over to Roth

[wk9458]

I over contributed to my non-deductible IRA in 2021 by $3000, and then rolled over all contributions to a Roth IRA.

I'm not quite sure where to start to get this info into TurboTax to have it calculate things correctly. The best I've seen is that TurboTax asks for the amount in all of your Traditional IRAs at year-end, which in my case is zero. But I think that is taking into account that the money wasn't just withdrawn - it was rolled over to a Roth. So there is still some penalty to account for?

Summarizing:

1) Excess contribution of $3000 in 2021 to traditional IRA

2) Invalid rollover of excess contribution to Roth

My questions are:

1) How to enter this into Turbo Tax?

2) What are the penalties/accounting for the amounts so that I can double check?

3) What forms does this info end up on?

4) Any other reference/reading material on handling this situation?

[DanaB27]

You will have to request to withdraw the excess contribution plus earnings from your Roth IRA by the due date of your 2021 tax return (including extensions) to avoid the 6% penalty for 2021.

You will enter the nondeductible traditional IRA contribution but do not enter that you withdrew the excess contribution on the penalty screen otherwise TurboTax won't create Form 8606 and your conversion will be taxable. Since you value in the traditional IRA is $0 you won't get a penalty calculated on Form 5329 part III.

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. If you had a basis in the Traditional IRA before then enter the amount.
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

In your case the contribution will be automatically made nondeductible since you made an excess contribution.

To enter the 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 2022 Form 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 Form 1099-R into the 2022 tax return since the withholdings are reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 1099-R in your 2021 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 2021?"
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 the "Which year on Form 1099-R" screen say that this is a 2022 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

[wk9458]

Thank you for the excellent reply. I have the desktop version (Mac), but the instructions are clear enough to understand on that too. I had one question after following all of this, however.

I followed the instructions and am seeing the $3000 on 1040 line 4b (no earnings on this amount). Is there another spot where this $3000 should appear other than the 1099-R? I'm curious to make sure I'm accounting for any/all penalties. For example, should a 10% penalty be present anywhere due to early distribution from Roth IRA? (I am under the age of 59 1/2). 

[DanaB27]

The traditional IRA contribution should be nondeductible, please check Form 8606 that it lists the $3,000 contribution on line 1. Then the conversion should be tax-free and line 4b of Form 1040 should only list the earnings of the excess contribution (from the created Form 1099-R with code PJ box 2a.) 

Yes, only the earnings on the excess contribution will be subject to the 10% early withdrawal penalty and this will be calculated on Form 5329 part I.

@wk9458

[wk9458]

This is what's happening in the app from what I can tell:

TurboTax has $6000 on line 1 of Form 8606. I think it's removing the $3000 over contribution from this line because I answered that the $3000 withdrawal from the Roth was to correct the over contribution in the traditional IRA?

So when TurboTax gets down to Part II in form 8606, it puts $9000 for the amount converted from Traditional to Roth on line 16, $6000 on line 17 (contributions to traditional IRAs), and $3000 on line 18 (taxable amount).

[DanaB27]

To verify, you made a $9,000 nondeductible contribution and converted $9,000 from your traditional IRA to Roth IRA in 2021, correct?

Please do not enter that you removed $3,000 on the penalty screen during the IRA contribution interview otherwise $3,000 of the conversion will be taxable. Since you stated that your value of the traditional IRA was $0 TurboTax won't calculate the 6% penalty on Form 5329 part III.

@wk9458

[wk9458]

Hmm. I'm not seeing the penalty screen. And to be clear, I actually had two contributions make up the $9000. $3000 to one custodian, and then another $6000 to a second custodian (which is why neither of them caught the over contribution).

I've entered the following:

1) 1099-R for the $3000 distribution from Traditional IRA (convert to Roth)

2) 1099-R for the $6000 distribution from Traditional IRA (convert to Roth)

3) 1099-R for the $3000 distribution from the Roth that I manually entered. I've added code J and code P for box 7 as instructed in this thread.

When I go back to edit those forms, I don't get anything allowing me to update the $3000 Roth corrective distribution. I do get the following message:

"Based on the code you entered in box 7 of this 1099-R, you're paying extra tax on this money."

When I hit continue after entering all 1099-R's, I get to an explanation screen "You told us that XXXX received a return of an IRA contribution before April 18. Explain here the details of the return of contribution."

[DanaB27]

Please follow these steps to find the penalty screen the entry during the IRA contribution interview (where you entered your contributions):

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Continue until the penalty screen and make sure it is blank.

No, the you will pay the 10% penalty on the earnings of the excess contribution (shown in the retirement section). 

@wk9458

[wk9458]

Ok, I found it!  Now I see everything showing up as you said it should.

I am on the OSX CD/Download version, so the search function didn't work properly. To get to the screen you mentioned, I had to go to "Deductions and Credits" tab -> "Retirement and Investments". I was mistakenly trying to find it on "Wages & Income" tab -> "Retirement Plans and Social Security."

Thanks again for all your help!