How to report Roth IRA 'return of excess' that includes earnings with positive capital gains?

[KRY3]

- Ineligible Roth IRA contribution in 2020.
- Have not finished filing yet and already requested a 'return of excess' from financial institution including earnings.
- I believe I now do not have to pay 6% penalty on excess contribution but seems a 10% fee on the earnings may apply?

Q: how do I report this on my filing in Turbotax? If I should report the earnings as income, how/where do I do that? Also, my earnings are from stock capital gains - do I need to pay capital gains tax as well? If so, for year 2020 or 2021?

Thanks...

[TomD8]

I recommend you read this web reference regarding the various ways to deal with an overcontribution to a Roth IRA:

https://www.investopedia.com/what-to-do-if-you-contribute-too-much-to-your-roth-ira-4770686#:~:text=....

[KRY3]

Thanks for the link @TomD8. However, I have already identified and remedied the excess contribution by withdrawing the the amount plus its associated earnings. My question was how to actually report this situation and how to handle the capital gains realized in the withdrawn earnings. Any help, info, or links about that would be much appreciated!

[TomD8]

Check with your IRA custodian, but what will probably happen is that they will send you a 2021 Form1099-R next January.  You may also have to file a Form 5329.

https://www.irs.gov/pub/irs-pdf/f5329.pdf

[ThomasM125 · Accepted solution]

You can wait until you get the 1099 for the distribution (in 2022) to amend your 2020 return, or you can do the entry now so you won't have to amend your 2020 return.

If you choose to make the entry now, you can do so but you will need to know what the income your earned on the investment was while it was in the IRA in 2020.  To report the earnings on the contribution, you should enter a Substitute form 1099-R and enter it on your 2020 return. You will see an option for this when you see the screen Tell us Which 1099-R You Have. 

Enter in box 1 the excess distribution amount . In box 2 enter the earnings. Enter code "8" and "J" in box 7. 

When you take a distribution from an IRA, the income is ordinary income even if it came from the sale of capital assets, so you will enter all of the income in box 2 on your substitute 1099-R entry.

[KRY3]

Very helpful @ThomasM125 , thanks!