2023 Excess Roth IRA Contribution

[VinnieT49]

@butimnotachef wrote:

For the excessive contribution removal before tax filing, under what case should we be filing a form 4852? turbotax mentions if you haven't gotten 1099-R that you may want to use this so I'm confused between doing this and just filing a 1099-R? 

"4852 is a substitute form W-2.  You would never file that in connection with a removal of excess IRA contribution."

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I'd like to bring this up again since I don't see a definitive answer shown in this thread.  Identifying the self-created 1099-R as a "substitute" does trigger TT into producing a 4852 for reporting the 1099-R.  TT then goes thru a questionnaire to complete the explanations for the 4852.  Is that correct or not since there seems to be a difference of opinion?  Should it not be marked as a “substitute”?  The 4852, in least in my case, also causes my state return (CA) to have to be filed in paper by mail instead of electronically due to that form being included in the federal return.

[fanfare]

You don't use a substitute 1099-R

you don't need to do that because you are going to tell TurboTax it is a 2024 1099-R with code P.

@VinnieT49 

[DanaB27]

You don't need to say that the Form 1099-R is a substitute Form 1099-R. Using a substitute Form 1099-R will cause issues with e-filing. You will get the 2024 Form 1099-R that you are entering in 2025 therefore creating Form 4852 is not necessary.

"Form 4852 serves as a substitute for Form W-2, Form W-2c, and Form 1099-R (original or corrected), and is completed by taxpayers or their representatives when:

• Their employer or payer does not give them a Form W-2 or Form 1099-R.
• An employer or payer has issued an incorrect Form W-2 or Form 1099-R." (IRS)

@VinnieT49 

[VinnieT49]

Thank you both for the clarification.  It sure helps my confidence that I'm doing this correctly.  Sorry for all of the questions but this is the first time I've had to deal with a situation like this and subtle nuances and how interpreting a single word description, like "substitute", creates doubt and could change the return in a big way.  One small change can sure affect the return in a negative way which I'm trying to avoid all costs.  This have been a learning experience!

[kllesser]

DanaB27,

My son contributed a total of $6770 to his Roth IRA for 2023.  We caught the error and had the excess contribution ($270) and the NIA ($15.15) distributed in Feb 2024 (so total distribution of $285.15).  I'm working on his tax return now and want to make sure I enter everything correctly in TurboTax and will still be able to file electronically and not have issues with the Virginia state return.  I have three questions:

1) You mention in this post (and others) that only the earnings should be included in the "Corrective distributions made before the due date of the return" but a previous commentor had a screenshot where the total distribution was entered.  Which is correct?

2) When entering the 1099-R information, should the IRA/SIMPLE/SEP box be checked?  How much of the other information (Payer name, address, Fed ID number), needs to be filled in?

3) When entering the Roth IRA contributions in Deductions & Credits, should I enter the original amount contributed ($6770) and then enter $270 on the "Contributions Withdrawn Before the Due Date" screen?  OR should I just enter $6500 for the first and $0 for the second?

Thanks!

[DanaB27]

1. You only enter the earnings because only the earnings are taxable income and are listed on Form 5329 line 1. Also, line 2 states “Early distributions included on line 1 that are not subject to the additional tax” Therefore, you only need to enter the earnings on the "Did you use your IRA to pay for any of these expenses?" screen.

2. No, the IRA/SIMPLE/SEP box isn’t checked for a Roth IRA distribution. Yes, you will need to enter Payer name, address, and Fed ID number. Check with the financial institute if you do not know this information.

3. Both options are correct but I prefer to enter the $6,770 as contributed and then the $220 as withdrawn before the due date. 

@kllesser 

[Opus 17]

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@kllesser wrote:

DanaB27,

My son contributed a total of $6770 to his Roth IRA for 2023.  We caught the error and had the excess contribution ($270) and the NIA ($15.15) distributed in Feb 2024 (so total distribution of $285.15).  I'm working on his tax return now and want to make sure I enter everything correctly in TurboTax and will still be able to file electronically and not have issues with the Virginia state return.  I have three questions:

3) When entering the Roth IRA contributions in Deductions & Credits, should I enter the original amount contributed ($6770) and then enter $270 on the "Contributions Withdrawn Before the Due Date" screen?  OR should I just enter $6500 for the first and $0 for the second?

Thanks!

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Follow the instructions and pictures from this post.

https://ttlc.intuit.com/community/retirement/discussion/re-2023-excess-roth-ira-contribution/01/3190...

For the withdrawal, enter the entire distribution in box 1 of the substitute 1099-R, and the taxable amount (the earnings) in box 2a.  Use distribution codes J and P.   You can ignore the question about "how did you use this money because it might reduce your tax" because the withdrawn earnings ($15.15) are always taxable, and withdrawn earnings due to a correction are never subject to the 10% penalty for early withdrawal (this is a recent change in the tax law).  

"3) When entering the Roth IRA contributions in Deductions & Credits, should I enter the original amount contributed ($6770) and then enter $270 on the "Contributions Withdrawn Before the Due Date" screen?  OR should I just enter $6500 for the first and $0 for the second?"

Either is correct, it doesn't matter.  Roth contributions are not tax deductible, so what you enter here won't change your taxes, except that entering the correct amount is what allows the program to calculate your excess for you.  So I would enter $6770 and $270 just to be consistent.

[Neal10]

Hi, I am in a similar situation re excess roth contributions. I have already moved the contributions out of the account and am following the instructions in this thread  (created a faux 1099-R). It looks like turbotax is calculating a 6% penalty ($6500 excess contribution * 6% = $390), but I believe I should only have to pay tax on the earnings of ~$700. How do I get turbotax to remove this from my taxes owed? I am using turbotax premier online. Thank you

[Opus 17]

@Neal10 

There are two ways of doing this.

1. If you enter the $6500 and the program tells you that you have an excess of $6500, it should ask you, will you remove the excess before the deadline?  Say yes, that should remove the penalty.

2. Or, simply don't enter any Roth IRA contribution at all.  If you remove it before the deadline, it will be as if you never made it in the first place.  

Separately of course, you should enter a 2023 substitute 1099-R showing a total distribution of $7200, taxable amount of $500, and box 7 codes J and P.  That should only tax you on the $700 earnings. 

[Neal10]

Thanks Opus. Removing the Roth contribution on the federal portion got rid of the penalty and I'm only tax on the gain. One follow-up question. I'm filing in Massachusetts and turbotax is calculating a tax on the full ~$7200 for my state return. Shouldn't I just be taxed on the ~$700 gain? How do get that carry over properly? Thank you for the help.

[DianeW777]

Yes, the Massachusetts (MA) return should tax only the $700 gain. Either put only $700 in the MA state field on the federal return (1099-R).  You can use the federal EIN for the state if there isn't one, but do not enter any dash or letters.  Or when you are in the MA return, watch for a screen where you can make an adjustment.

Differences Between MA and Federal Tax Law 

• Roth IRA Contributions are not deductible for either Massachusetts or federal purposes.
   
• Roth IRA Distributions in excess of contributions are excluded from federal income if certain age and holding period requirements are met.  Such distributions are excluded from Massachusetts income to the extent that they are excluded from federal income.

@Neal10 

[Neal10]

Thanks for the followup. I just tried putting the ~$700 gain in box 16 in the state info section of the 1099-R screen and it unfortunately did not make any changes to my state tax owed. I use turbotax premier online and I did not see anywhere going through the state section where I could modify the distribution. Am I missing something? 

[DanaB27]

You will have to enter the contributions previously taxed by Massachusetts (include the $6,500 excess contribution) and distributions received in prior years on the "Taxable IRA/Keogh Distributions" screen during the state interview.

@Neal10 

[Vicky75]

This is a follow up to the response stated “Yes, the earnings will increase your MAGI and therefore can change how much is excess contribution. Usually it is best to remove a little extra when you are in the phase out range to avoid that issue.

You still have time to remove the new excess contribution for 2023, by requesting another withdrawal of excess contribution plus earnings by the due date. Just keep in mind any new earnings will raise your MAGI again and you might want to withdraw a little extra to avoid any further issues.”

Will you get penalized for removing a little more than the excess contributions to avoid the changes in MAGI due to the earning so you don’t  end up with another smaller balance of excess contributions?

[DanaB27]

No, you will not get penalized for removing a little more than the excess contributions to avoid the changes in MAGI. Just make sure you request the withdrawal of excess contribution plus earnings.

"Income on corrective distributions of excess contributions. The income on the corrective distribution of excess contributions made on or after, December 29, 2022, is no longer subject to the 10% additional tax on early distributions." (Pub 590-B)

@Vicky75