Miscalculated Excess Contribution and withdrew too much money from Roth IRA

[Jonness]

I pulled $800 of what I thought were excess contributions from my Roth IRA prior to the 10/16/2023 extended filing deadline for tax year 2022, plus another $20 dollars in calculated earnings. Then I realized (based on my income), I only had $710 of excess contributions and had inadvertently pulled out an additional $90 plus associated earnings. I'm guessing I will get a 1099-R next year from my brokerage firm that lists the full $800 withdrawn as and excess contribution and $20 as earnings on this excess. I'm not sure how to best clean up my error?

I'm under 59-1/2 and have had the account for less than 5 years. Do I need to pay a 10% penalty on the earnings related to the extra $90 I pulled out? What is the best way to clean up the mess I've made?

Thanks!

[tagteam]

I'll page @dmertz.

[dmertz · Accepted solution]

As I understand it, you requested a return of $800 of your 2022 Roth IRA contribution and that was accompanied by $20 of earnings for a total gross distribution of $820.  A return of contribution is irrevocable and it's too late to make a new contribution for 2022, so there is nothing that you can do to undo the distribution.

Assuming that the Roth IRA contribution was made before the end of 2022, the Form 1099-R will have $820 in box 1, $20 in box 2a and codes J and P in box 7.  The $20 is taxable on your 2022 by entering into 2022 TurboTax this 2023 Form 1009-R and indicating that the form is a 2023 form.  2022 TurboTax will include the $20 on Form 1040 line 4b.

2022 TurboTax will also treat the $20 as subject to a 10% early distribution penalty, but the SECURE 2.0 Act eliminated this penalty for such distributions occurring on or after December 29, 2022.  You'll need to claim an Other Reason exception with respect to this $20, code 12 on Form 5329 line 2, to eliminate the penalty.

[Jonness]

That makes perfect sense. Thanks so much for your help!

[Jonness]

I ran into a couple of issues with the online Turbo Tax software. I entered the 1099-R information as suggested. I also entered $20 for Other Reason exception. But I'm not sure how to access Form 5329 line 2 code 12? I don't see a way to view or interact with the 5329 form. 

I also got a prompt to review the IRA Contributions Worksheet Line 26, and it is indicating the following, which I don't understand.

"Taxpayer's excess Roth IRA contribution credit should be equal to $99, the Roth IRA contribution credit from Form 5329 Part IV."

[dmertz]

Entering the $20 as qualifying for the Other Reason exception causes TurboTax to include the Form 5329 in your tax return.  You can view the form when you print your tax return before filing.

The error message implies that you've told TurboTax (or transferred in from your 2021 tax return) that you have an excess Roth IRA contribution of $99 or more carried into 2022 from 2021.  You haven't mentioned above anything about having made an  excess contribution for 2021 or earlier.  TurboTax is implying that you should  be applying $99 of that carried-in excess to fill out the otherwise unused portion of your 2022 contribution limit (the portion opened up by having returned to you more than the amount of your 2022 excess contribution).  If you actually had no excess contribution in 2021, you need to remove the erroneous entry that you made saying that you did.

[Jonness]

I learned some additional information that you might find interesting. It appears the online form has been updated for the section: "Did you use your IRA to pay for any of these expenses?"

In addition to "Another reason" they also have a selection for "Corrective distributions made on or after December 29, 2022."

[dmertz]

Thanks, I was unaware of that.  The Instructions for Form 5329 published on 03/06/2023 indeed have added code 21 for this exception (among many other exceptions that used to be lumped together under code 12 but are now made explicit), so you should see code 21 on line 2 of your Form 5329.

[Jonness]

I corrected my error with the prior year Roth contribution and electronically filed the forms.

I saw code 21 on line 2 of the 5329.

Thank you so much for your help!!!