I have a question regarding excess IRA contribution.
I have contributed $4,500 to my Traditional IRA and $2,500 to my Roth for tax year 2020. As you can see there is $1000 excess contribution. I am 34 years old. I already ask my brokerage firm to withdraw that $1,000 (from Roth IRA) and about $300 earning (gain) to avoid 6% excess tax. As I know my brokerage firm is going to issue 1099-R in 2021.
Kindly advise how should I report $1000 distribution and $300 earning in my 2020 tax return. (considering the fact that I am going to receive 1099-R in 2021)
Thank you for your help in advance.
The best option would be to take the excess contribution out including any income it earned.
You tell TurboTax that the excess has been removed so a penalty is not applied and the excess does not carry forward. You would enter $7000 as the total amount of your contribution. As you proceed with the entry, Turbo Tax will indicate that you have an excess contribution of $1000 plus and will ask you if you plan on withdrawing this before the due date of your return.(April 15)
Since you have already withdrawn the excess contribution, you will say "yes". The penalty will not be applied based on this answer..
The IRS lets you pull out excess IRA contributions without penalty as long as you do it before the tax filing deadline. For contributions made in the current tax year, you have until the April tax filing deadline to take the money back out. If you normally file an extension, you have until the extension deadline to take back your extra money.
When you’re pulling out contributions, you’ll also have to take out any earnings the money generated while it was in the IRA. The earnings then have to be included on your tax return as ordinary income. Aside from paying taxes on the money, you’ll also have to pay a 10% early withdrawal penalty if you’re below the age of 59 1/2.
Thank you so much for your help.
If you do not mind I have a follow up questions.
1. Should I enter that earning under other income (description: Earning from Roth IRA Excess Contribution )?
2. Am I going to pay 10% penalty when I enter 1099-R info in 2021 tax return?
1) You will get a 1099-R in 2021 with codes P and J. This 1099-R will have to be included on your 2020 tax return and you have two options:
- You can wait until you receive the 1099-R in 2021 and amend your 2020 return or
- You can report it now in your 2020 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 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.
To create a 1099-R in your 2020 return please follow the steps below:
- Login to your TurboTax Account
- Click on the Search box on the top and type “1099-R”
- Click on “Jump to 1099-R”
- Select "I'll type it in myself"
- Box 1 enter total distribution (contribution plus earning)
- Box 2 enter the earnings
- Box 7 enter P and J
- On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
2) Yes, you will have to pay a 10% penalty on the earnings.
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