2019: Roth IRA Distribution Question

[phildonnia]

Dang, my taxes are a mess this year.  I need some help understanding this.

In 2019 my Roth IRA contribution was limited due to high AGI. I elected to pay the penalty and then take a distribution in 2020 to set everything right.

However, the custodian sent me my distribution plus earnings, since apparently, that was what they do when it's before the tax deadline.  As I understand it, this means that I need to amend 2019, claim the earnings as income, and then pay a 10% penalty on the earnings.  Fine.

But Just now, I got an unrelated amended 1099, which had the effect of lowering my 2019 AGI so that I am now fully eligible for the Roth.  

I entered this all into TurboTax, and I'm not sure it's showing up correctly on the forms.

1. Form 5329 Part I does not have the earnings, and does not apply the penalty.

2. Form 5329 Part IV shows the entire amount including the earnings as a distribution. 

3. Form 1040 Line 4b does not show the earnings as income.

It's as though TT is considering the entire distribution, including the earnings as just a normal Roth distribution from my contribution basis, even though the Roth custodian considered it a corrective return of contribution.  Is this correct? 

[Opus 17]

I'm going to make sure @dmertz sees this, because it might not show up as unanswered after I ask this somewhat-related question:

Why does a revised 1099 change your earned income?  If you are self-employed, you are required to keep accurate records and report all your business income and expenses, regardless of whether you get 1099s or not.  If someone changes a 1099 that shouldn't change your income because you should have been reporting the correct income all along.  (There are at least 2 ways of reporting a 1099 that is incorrect while still reporting your correct income.)  Why does this changed 1099 change your income?

[dmertz · Accepted solution]

I'll ignore the reason for the change in AGI other than to say that if you are now eligible to make the Roth IRA contribution, you have until July 15, 2020 to do so.  Your contribution returned before the due date of your tax return will be treated as never having been made, other than the fact that the earnings that accompanied the distribution are subject to tax and to early-distribution penalty.  Keep in mind, though, that once the earnings distributed with the returned contribution are added to your tax return as described below, your AGI will increase by the amount of the earnings, so make sure that you are still eligible to make the Roth IRA contribution.

The earnings are reported on your 2019 tax return (form 1040 line 4b and on Form 5329 Part I) by entering the code JP 2020 Form 1099-R that you will be receiving near the end of January next year.  Assuming that you had no taxes withheld from this distribution, you can enter into 2019 TurboTax a dummy Form 1099-R showing the amount returned plus earnings in box 1, the amount of earnings in box 2, and codes J and P in box 7, making sure to indicate in the follow-up that this is a 2020 Form 1099-R.  You can then ignore the 2020 Form 1099-R when you actually receive it.

To eliminate excess shown in Form 5329 Part IV, revisit the Traditional and Roth IRA Contributions section and, when TurboTax indicates that you have an excess contribution and asks how much you had returned, enter the amount of contribution returned (not including earnings).  Continue until TurboTax asks you to prepare an explanation statement for your return of 2019 contribution before the due date of your 2019 tax return.

The way to have gotten your intended result would have been to request a regular distribution in 2020 and not to mention anything to the IRA custodian about an excess contribution.  You could have also gotten the desired result by waiting until after October 15, 2020 to request the distribution, the date after which the custodian is not permitted to process it as a return of contribution before the extended due date of your 2019 tax return.

[phildonnia]

@Opus 17 

The corrected document was a 1099-B.  The correction removed a large capital gain, which resulted in a lower AGI.  The Roth IRA limit was not for earned income, it was for eligibility based on AGI.

Yes, I should enter correct information regardless of what my received documents say.  In fact, I pointed out to the broker that I thought it was wrong, and they insisted that it was correct.  Given my level of understanding, it was reasonable to assume that I was confused, and the broker had it right.

Six months later... a correction!  What else can I do!

[phildonnia]

Ah, I missed entering the code 'P'.  I only had the 'J'.  Didn't realize I could enter more than one.  I don't actually have a 1099-R.  That should fix it, thanks.

Yes, I mis-communicated to the broker about the reason for the distribution.  I think it's too late for that now.  Waiting until the end of the year to do all this would have made it simpler.

Thanks for your help!

[dmertz]

When you receive the 2020 Form 1099-R, just make sure that it really does have codes J and P.  If it has only code J, it was processed as a regular distribution as intended except that the custodian inappropriately distributed attributable earnings as well.  But given that the rep said "this is how we do it before the due date of your tax return," I expect that you'll see codes J an P.

[Opus 17]

@dmertz 

" if you are not eligible to make the Roth"

do you mean "if you are now eligible to make the Roth"

[Opus 17]

---

@phildonnia wrote:

@Opus 17 

The corrected document was a 1099-B.  The correction removed a large capital gain, which resulted in a lower AGI.  The Roth IRA limit was not for earned income, it was for eligibility based on AGI.

Yes, I should enter correct information regardless of what my received documents say.  In fact, I pointed out to the broker that I thought it was wrong, and they insisted that it was correct.  Given my level of understanding, it was reasonable to assume that I was confused, and the broker had it right.

Six months later... a correction!  What else can I do!

---

That's completely understandable with a 1099-B.  That's what brokers are paid to do.  I was thinking along the lines of a 1099-MISC for self-employment or some other miscellaneous income. 

[dmertz]

Opus 17, thanks for catching my typo.  I've corrected it.