is there a penalty for over contribution to Roth IRA in 2024 but removed before filing taxes? Turbotax online for 2025 is calculating a penalty.

[bob_nadon]

Originally deposited in Roth IRA up to the contribution limit for 2024. Determined I could not contribute the full amount. Removed excess contribution prior 04/15/2024. I actually lost money during the time period the funds were in the Roth account. Received a 1099-R for 2025 reporting the excess amount. Using Turbotax Online Premium, it is calculating the 6% penalty on the entire excess amount. From what I'm reading, there should be no penalty given I removed the amount prior to the 04/15/2024 filing deadline for 2024.

[ReneV4 · Accepted solution]

No. There should not be a penalty since you removed the excess contribution and any earnings/losses prior to the tax filing deadline.

Here is how to help TurboTax stop calculating the incorrect penalty amount. 

Your Form 1099-R may only show a code J or P in Box 7, so you will need to add the additional code of P or J for Box 7 (J & P both), to indicate that this is a prior year correction by following these steps: 

1. Go to Income on the left panel within your TurboTax account
2. Click on the Review to the right of IRA, 401(k), Pension Plan Withdrawals (1099-R)
3. Click on the pencil to the right of your 1099-R to review/edit it
4. Continue through the questions until you reach, "Enter your 1099-R details from _"
5. Enter the information from the original Form 1099-R that you received
6. For Box 1, enter the original contribution + earnings amount
7. For Box 2a, enter only the earnings amount (which is zero, since you had a loss)
8. Ensure the details from your Form 1099-R are correct, including Distribution Codes J & P being used in Box 7, then Continue

Next, you will need to go to Deductions & credits to clear out the "balance" in the account so that TurboTax knows it is no longer in the account:

1. Go to Deductions & credits on the left panel within TurboTax
2. Scroll down to Retirement and Investments and click the down arrow
3. Select Start/Revisit to the right of Traditional and Roth IRA Contributions
4. Select Roth IRA, then Continue
5. Enter your 2025 (not 2024 yet) contribution amount, Continue
6. Select "No" to, "Did you recharacterize?", Continue
7. Select "Yes" to, "Did you open any Roth IRAs in 2024...?", Continue
8. Select "Yes, or No" whether you want to track your Roth IRA basis, Continue
9. Enter the amount of your 2024 excess contribution, Continue
10. In the "You had a prior year excess contribution of $, how much...toward your 2025...?", enter zero

By following these steps, Form 5329 should show zero for the additional tax penalty on line 25.

[bob_nadon]

That did the trick!  Much appreciated.