I thought I had overcontributed to my Roth IRA so I withdrew some amount of contribution + earnings on those contributions.
From the research I've done, withdrawal of contributions from a Roth IRA should be tax free and penalty free (though the earnings aren't). This should be the case regardless of age or the holding period.
I received my 1099-R from my brokerage (Betterment) who listed the entire amount withdrawn ($1,269.53)
as taxable amount rather than just the earnings. So box 1 = box 2a, and box 2b taxable amount not determined is checked. With distribution code J8.
I asked my brokerage why it lists the full amount and not just the earnings and they said it's because they just list the total amount that could be taxable, since they don't know the full extent of my situation, and that's why 2b is also checked.
From doing research it seems that what's supposed to happen is that as I fill out my tax forms through Turbo Tax, after I fill out my basis from before 2019, it should determine how much of my withdrawal is actually taxable and therefore not charge me on the contributions.
Entering my 1099-R causes my refund to drastically reduce, yet entering my basis has not fixed it at all.
A couple questions
- When I'm asked to enter Roth IRA contributions for 2019, it says not to include the amount entered on Form 1099-R. Does that mean I enter $6000 - $1,269.53? However the amount includes earnings, not just contribution.
- How do I fix it so it recognizes that I withdrew contributions that should not be taxed/penalized?
The returned Roth contribution is not taxable, only the earnings are. It sounds like your 1099-R is not correct because only the returned earnings should be in box 2a per the IRS 1099-R instructions that the Roth administrator is required to follow.
https://www.irs.gov/instructions/i1099r
Roth IRA.
For a distribution from a Roth IRA, report the total distribution in box 1 and leave box 2a blank except in the case of an IRA revocation or account closure and a recharacterization, earlier. Use Code J, Q, or T as appropriate in box 7. Use Code 8 or P, if applicable, in box 7 with Code J. Do not combine Code Q or T with any other codes.
However, for the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a. Enter Code J and Code 8 or P in box 7.
The returned Roth contribution is not taxable, only the earnings are. It sounds like your 1099-R is not correct because only the returned earnings should be in box 2a per the IRS 1099-R instructions that the Roth administrator is required to follow.
https://www.irs.gov/instructions/i1099r
Roth IRA.
For a distribution from a Roth IRA, report the total distribution in box 1 and leave box 2a blank except in the case of an IRA revocation or account closure and a recharacterization, earlier. Use Code J, Q, or T as appropriate in box 7. Use Code 8 or P, if applicable, in box 7 with Code J. Do not combine Code Q or T with any other codes.
However, for the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a. Enter Code J and Code 8 or P in box 7.
@shiwens wrote:
- When I'm asked to enter Roth IRA contributions for 2019, it says not to include the amount entered on Form 1099-R. Does that mean I enter $6000 - $1,269.53? However the amount includes earnings, not just contribution.
The code "8" means that it was a 2019 contribution returned in 2019 so that is like you never made any Roth contribution at all, so do not enter anything in the IRA contributions section.
Contact the Roth IRA custodian to obtain a corrected Form 1099-R showing the actual taxable amount, if any, in box 2a. A code J8 Form 1099-R can NEVER have an amount in box 2a that is the same as is in box 1. (Box 2a equal to box 1 on a code J8 Form 1099-R implies that you had nonzero earnings attributable to a $0 contribution being returned, which is nonsensical.)
@macuser_22, @dmertz thank for your responses! It's very helpful to know that this might be an issue with the 1099-R so I'm no longer running in circles.
@macuser_22 Thank you for linking that url! Definitely helped clarify what's supposed to happen in the 1099-R form. A quick question, when I made the withdrawal I marked that it was for the purpose of over contribution (thus the J8 code), however I am actually not 100% sure that I had actually over contributed. I just figured it'd be better safe than sorry since withdrawing contributions isn't supposed to be penalized anyways and I didn't want to risk getting penalized for over contributing. Do you know if that will have any impact on what's supposed to happen?
I will reach out to my brokerage for a corrected 1099-R form as suggested by @dmertz . However just a preemptive question in case they don't do anything (since they basically just responded that that's how they fill the form when I last reached out), would I need to instead select to fill a substitute 1099-R and fill it out with the information from my actual 1099-R but fill 2a with the earnings instead of the whole amount?
@shiwens wrote:
However just a preemptive question in case they don't do anything (since they basically just responded that that's how they fill the form when I last reached out), would I need to instead select to fill a substitute 1099-R and fill it out with the information from my actual 1099-R but fill 2a with the earnings instead of the whole amount?
Correct. With a substitute 1099-R TurboTax will ask for an explanation statement of the reason for the substitute and the steps you took to get the issuer to correct the error. Since a Roth is after-tax money then returning it is not taxable or reportable but the box 2a earnings are.