Question on IRA contribution during retirement process

[steves8]

Hi, I retired on Feb 1, 2021 and I'm in my late 60s.  For the month of January, I was contributing to a 401k plan at work so my W2 shows a checkmark under Retirement Plan.  For the rest of 2021, I contributed 7k to a combination of a regular and Roth IRAs.  When doing my taxes, Turbo Tax is filling out Form 5329 and charging me additional taxes stating excess contributions.  Should that be the case?

[DanaB27]

It depends, on how much taxable compensation (wages) you had in 2021. To be able to contribute the $7,000 to an IRA you need $7,000 taxable compensation (IRS).

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. 

To avoid the 6% tax on excess contributions, you must withdraw:

• the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• any income earned on the excess contribution.

The earnings will be taxable on your 2021 tax return.

You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

Another reason why you might have an excess contribution: Your Roth IRA contribution may be limited based on your filing status and income. Please see 2021 - Amount of Roth IRA Contributions You Can Make for 2021 for details. If this is the case then please see What happens if I made an excess Roth IRA contribution for your options to fix the excess contribution.