I have no earned income, but I contributed to a Roth IRA. If I have Social Security income is that considered earned income? Any other options?

[DoninGA]

Social Security benefits are not earned income.

[DanaB27]

You need taxable compensation to make IRA contributions. As DoninGA mentioned Social Security doesn't count.

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.

If you made an excess Roth IRA contribution then you will have to request the return of excess contribution plus earnings by the due date (including extensions) to avoid the 6% penalty. 

To remove the 6% penalty in TurboTax when you request the return of excess contributions plus earnings by the due date:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Continue until the penalty screen and enter the excess contribution amount withdrawn by the die date.

If you made an excess contribution in 2024 and withdrew the 2024 excess Roth IRA contribution plus earnings in 2025 before the due date, then you will get a 2025 Form 1099-R in 2026 with codes P and J. This 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 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 2025 Form 1099-R into the 2025 tax return since the withholdings are reported in the year that the tax was withheld. The 2025 code P will not do anything to the 2025 tax return income but the withholdings will be applied to 2025.

To create a Form 1099-R in your 2024 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 2024?"
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 "Is the IRA/SEP/SIMPLE box on this 1099-R checked?" screen answer "No, the box is blank"?
11. On the "Which year on Form 1099-R" screen say that this is a 2025 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024.

@don-sonetti 

[skilletfan59]

I understand the procedure for all this, but I was wondering why this is not treated as a write off against your current loss rollover balance in a regular stock account? By having to do all this it is basically making it as if it was just in your after tax non retirement trading account all along but instead of it going against the same losses, you are forced to pay taxes on the gains as you would if there was no losses. Do you know why this is or is that just the way it is?

Thank you, just trying to make sure I resolve the situation correctly since I didn't know I couldn't contribute to it last year and now the gains are substantial.

@DanaB27 

[DanaB27]

That it how the law was written and  we have to follow it. 

If you had substantially gains, then you could pay the 6% on the excess contribution on your 2024 return and then remove the excess contribution without earnings after the extended due date (October 15th, 2025). If you remove the excess contribution after the due date, you only have to remove the excess contribution but can leave the earnings in the account. But be sure remove the excess contribution amount before December 31, 2025 to avoid paying the 6% penalty again on your 2025 return.

@skilletfan59