Paying taxes on earnings from excess contribution to Roth IRA

[pandasgorawr]

In 2022, I contributed to a Roth IRA for tax year 2021 and earned $58 in realized gains before noticing that my income was over the limit. I took the money out of that Roth IRA and did a backdoor Roth.

This year I received a 1099-R showing that as a distribution with codes 8J in box 7, which looks right to me. But there's nothing in box 2a, where I was expecting those $58 in gains.

Is my understanding correct? Should I go ahead and just put that down or do I need to go back to my brokerage and have them correct the form 1099-R? If my understanding is not correct, where in TurboTax do I pay the taxes and (I think) the early withdrawal penalty for those gains?

Thank you very much in advance.

[DanaB27]

Yes, I would check with your brokerage because the earnings should be listed in box 2a when you withdraw the excess contributions plus earnings. Also, since it was a contribution for 2021 removed in 2022 it should have codes PJ and the earnings would be taxable on your 2021 tax return.

Yes, the earnings will be taxable and subject to the 10% early withdrawal penalty if you are under 59 1/2.

[pandasgorawr]

Thank you very much for the quick reply. Just to make sure I fully understand:

1. Even if the entirety of the excess contribution and subsequent earnings all happened in 2022, it needs to be taxable on my 2021 return?

2. If I amend my 2021 return for this, does this mean the 1099-R I received this year doesn't need to be reported in my 2022 return?

Thank you!

[DaveF1006]

Yes, you do need to report the earnings in the year the excess contribution was made so these earnings do need to be reported in your amended 2021 return.  

You do need to to report the 1099R received this year as this will prove that you withdrew the excess contribution.  Usually the code that is reported on this type transaction is "P" in Box 7 and you will not be taxed on this 1099R. 

To report the earnings in your 2021 return:

1. Click Federal > Wages & Income>all income>
2. Go to the last selection, Miscellaneous Income and click Start
3. Go to the last option, Other reportable income and click Start
4. When it asks, "Any other reportable income?" say yes and then type in a description and the amount to report it on your tax return. 
5. Under description, report it as Earnings From Excess IRA contribution and then the amount of the earnings.