Question Regarding Roth IRA Excess Contribution

[mskcctax]

Hello everyone,

I know this question has been asked before but I have yet to get a consensus on the answer. I'll make this short and concise.

Started a Roth IRA for the first time October 2020 and deposited $6000. 

Fast forward February 2021, got my W2 and realized I over contributed $2000 and $100 in market gains. 

Going to file the 5329 saying I contributed $6000 and removed $2000 plus $100 in earnings in the market. 

I have not filed yet and trying to take care of this before filing. 

The account is with Schwab and my question is and where the conflicted answers are.

1. One answer I've seen is that all I need is to file the 5329 and the 1099-R will come on 2022 for the 2021 Tax year because I withdrew the excess in 2021 therefore that income / penalty will apply for 2021.

2. Another answer is that when I receive the 1099-R for 2021, the earnings will be considered 2020 income and I would need to amend my 2020 Tax Return. Some even suggested to submit a dummy form for 2020 before filing to remove the need to amend the return. 

I understand this will also depend on if a P or an 8 is checked on the 1099-R. I feel like Schwab is a big brokerage so they would be following standard procedure for this. This excess / gains will be removed this month in 2021 so I don't see how it can count for the Tax Year 2020. Really confused.

Can someone please answer this question. If it's not clear I can clarify this more if needed. 

[Irene2805]

You will deal with the excess contribution on your 2020 return, either now, while you're preparing the original return or on an amended 2020 return next year when you get the 1099-R

You need to prepare Form 5329 and include it in your 2020 return because the contributions for 2020 to your Roth IRAs exceeded your maximum contribution limit.

Be sure to withdraw the excess contribution and the earnings.

[mskcctax]

Thanks for replying!

I will be withdrawing the overage and the earnings this month. My main question is regarding the earnings.

Will the earnings be counted in the 2020 return or will be earnings be counted in the 2021 return since I removed the excess in 2021 even though it was regarding a 2020 contribution. 

[macuser_22]

You do NOT file a 5329 for the excess unless it is not removed by the extended due date of the 2020 tax return (Oct 15, 2021).

If yiu asked the financial institution for a "return of contribution plus earnings" of the 2020 excess in 2021 then you should receive a 2021 1099-R with a code PJ in box 7, the total returned amount in box 1 and the earnings in box 2a.    That 1099-R must be reported on an amended 2020 tax return because the earnings are taxable in the year contributed - 2020.   Only the box 2a earnings will be taxable and subject to a 10% early distribution penalty of you are under age 59 1/2.

If you KNOW that the financial institution will issue the 1099-R with a code PJ AND the exact amounts that they will put in box 1 and 2a, you can just enter it as if you have received the 1099-R so you will not have to amend when you receive the real 1099-R.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

[mskcctax]

So basically how I will proceed will depends on if my broker (Schwab) issues me a 1099-R now or in February 2021. 

[dmertz]

Since the return of the 2020 contribution occurred in 2021, Schwab has no choice but to report it on a code JP 2021 Form 1099-R and the gains shown in box 2a are taxable on your 2020 tax return.  Unless they choose to send the 2021 Form 1099-R earlier than the deadline for sending it, don't expect to see it until near the end of January 2022.

[msf50]

So I understand all this and see  the three choices.

1 Wait for the 1099R ( January 2022) and file an amended return.

2. If I have all  the data fill out the 1099R form by hand in Trubotax as if I have  already have it now.-

What does the IRS do if you do this before the 1099Rs are traditionally printed  for 2021- will it trigger an audit?

3. Fill out  the substitute !099R form which says you have not received one from your broker and explain you are doing it so you do  not have to file an amended return. This forces you to mail in your return, since when I tried it TurboTax  said I was no longer eligible.  Is this a better option than number 2? 

[dmertz]

Regarding Option #2, your explanation statement regarding the return of contribution takes the place of the Form 1099-R.  Entering the anticipated Form 1099-R into TurboTax simply causes TurboTax to include the gains on (2020) Form 1040 line 4b, it does not cause the entered 099-R itself to be included (unless the code is J8 and the Form 1099-R has tax withholding in box 4).

Option #3 is essentially no different that Option #2 except that it prevents you from e-filing.