IRA Excess Contributions/Excess withdrawal of 2021 - How to fix?

[Johndd]

Tax Year 2021: Filing status: Married File Jointly,  No Extension.

I have made few confusing steps/mistakes in excess contribution & withdrawal for 2021, and appreciate any help.  Thank you.

My Roth 2021 Contribution: $7,015

Spouse IRA 2021 Contribution: $1,500, Roth 2021 Contribution: $4, 500.  Total = $6,000

Due to too much earned income on 2021, we were not eligible for IRA contribution for 2021 (never happened before).  

2021 Tax filed by April 2022, and with the assumptions that these amounts are going to be withdrawn, None of these amounts were specified in the 2021 tax forms.  Thanks to the tax guy.

But in reality, these amounts were removed only around October, and this is where things started getting ugly.  I did not file for 2021 amendment, and tax guy did not mention about it. 

I removed $7,000 from my Roth IRA.

Plus I made a mistake of withdrew more ($5,000) in ROTH than contributed($4,500) and failed to remove Spouse's IRA ($1,500) due to first time withdrawal anxiety. 

Got two 1099-R with year 2022 and trying to take care of those in this year

Mine:  Line 1: for me 7752.09, Line 2: 752.09, Line 7: J, P

Spouse: Line 1: 5035.28, Line 2: 0, Line 7: J, P

Step 1: I have taken is filing for 2022 extension to take care of these issues.

Question 1: I did not file 2021 amendment.  Based on forums discussions, I need to file for 2021 amendment, do I need full amendment, or simply 5329 enough?

Question 2: Is it possible to use "extra contribution" $1500 of 2021 for year 2022, how to do it?  Do I have to work with my brokerage, plus how to report in the tax form?

Question 3: Is it possible to repay the extra amount withdrawn from Roth ($500), how to report?

I hope all these things can be done by Oct 15 due to extension and understand there is going to be penalty and I am fine with that.

BTW,  I am fixing these in turbo tax this year.

Thanks again for your help!

[dmertz]

As long as there was sufficient supporting compensation, it sounds like the $1,500 contribution was a permissible nondeductible traditional IRA contribution that was required to be reported on your spouse's 2021 Form 8606.  If so, there is nothing to correct with respect to the $1,500 contribution except for filing your spouse's 2021 Form 8606 if that was not already done.  This basis carries forward to be applied proportionately to any of your spouse's traditional IRA distributions.

The $5,035.28 code JP 2022 Form 1099-R doesn't make sense.  If this was a return of your spouse's $4,500 Roth IRA contribution, the amount in be 2a should be $535.28, not $0.

The taxable amount of each of the code-JP Forms 1099-R is taxable on your amended 2021 tax return.  The amendment needs to be marked as being "Filed pursuant to section 301.9100-2."  The amendment would also need to include corrected Forms 5329 to show that amount of excess contributions was $0 rather than $7,000 and $4,500.

[Johndd]

Thank you very much @dmertz 

Answer to the following statement:

"The $5,035.28 code JP 2022 Form 1099-R doesn't make sense.  If this was a return of your spouse's $4,500 Roth IRA contribution, the amount in be 2a should be $535.28, not $0."

I did contact the brokerage and apparently they calculated the amount based on my withdrawal request of  ($6000 and it was a mistake from my side) from Roth IRA while I should have requested only $4,500. 

Brokerage firm informs me that they will pull the amount I requested and they do not check what was contributed for that year, and they pulled more than the contribution of 2021.  This is why Line 2 has 0 was their explanation.  That brings the question of can I pay back that amount?

[dmertz]

The IRA custodian really did a disservice by not rejecting a request to return more contribution than was made.

Was the $4,500 contribution the only contribution ever made to this Roth IRA?  If so, the $5.035.28 could represent a return of the $4,500 contribution with $535.28 of gains.  If there was money in the Roth IRA prior to the $4,500 contribution, a $5,035.28 distribution for a return of a $6,000 contribution might be implying an investment loss of 16.0787%.

Do you have an idea of whether there was an overall investment gain or investment loss in the account between the time of the $4,500 contribution and the $5,035.28 distribution?

[Johndd]

@dmertz Appreciate your effort answering my questions.

Yes, that's what I felt when my custodian said "we do not check what you have contributed rather distribute what you request".  Now, it is my job to fix it.

Yes, Roth a/c did have money before that.  Apparently after 4500 was deposited, this account lost money.  The extra money beyond 4500 was from existing amount.  Overall this a/c is in loss for at least year or two.

[dmertz]

It seems that you will need to submit two substitute Forms 1099-R in place of the one provided by the payer.  One will reporting the actual return of contribution and the other a regular distribution.  $5035.28 being distributed as a return of a $6,000 contribution implies a loss of 16.0787% during the computation period.  Applying that loss factor to a return of $4,500 of contribution results in a corrective distribution of $3,776.46 in box 1 of the code-JP 2022 Form 1099-R and the remainder reported on a 2022 Form 1099-R with $1,258.82 in box 1, a blank box 2a, box 2b Taxable amount not determined marked and code J in box 7.