Advice on reporting Roth IRA excess contributions + earnings when 1099-R will have conflicting info.

[uk05]

I’m receiving contradictory info on how excess contributions I made in 2019 & 2020 should be filed with the IRS. While brokerage firms technically do not provide tax advice, they do compile my 1099-R on returned contributions + earnings and/or normal distributions taken on Roth IRA’s including the excess contribution correction I completed in Jan 2021. So if I file my return with info that doesn’t line up I suspect the IRS will flag it.

It would be highly appreciated if I could get some clarity on this as it’s honestly becoming a nightmare and monopolizing all my time. And for what it’s worth, I’ve sought professional assistance from CPA's on this topic offering to pay them to complete my taxes, and none seem to know how to handle the situation, which is shocking to be honest. I’m hoping to put this to bed once & for all with this post, and any advice with supporting tax code documentation would be appreciated.

So here are the details:

In Jan 2020, I opened a Roth IRA (my only one). Added $6k for 2019, and $6k for 2020. Earnings were accumulated via stocks that appreciated. In Jan 2021, realized I over-contributed based on my MAGI, then immediately liquidated my stocks and completed a single excess contribution correction form to withdrawal ALL funds in my Roth IRA account (that covered 2019 AND 2020 allowed contributions + excess contributions + associated earnings). Funds finished transferring over to my individual brokerage account Feb 2021, which is before the 2020 tax deadline. 

note: I worked w/ 2 different reps at the brokerage firm; the first initially to complete the excess correction form in Jan 2021, then a second to get the 1099-R info just now in April 2021 to help me fill out my 2020 amended federal where I would report earnings on my excess contributions.

A. My brokerage firm provided the following guidance:

Since your contributions for 2019 & 2020 were both made in the 2020 tax year (Jan 2020), and the excess contribution correction form was completed before the 2020 tax deadline (Jan 2021), this is considered a timely withdraw of both. Your earnings from both will be added to your MAGI & taxed in the 2020 tax year. You will not need to pay the 6% penalty for 2019, nor 2020, but will have to pay the 10% penalty on earnings in the 2020 tax year since you’re under 59 1/2. Since a single excess correction form was completed, you will get a single 1099-R in Jan of 2022 that will have the following info on it:

In Box 1, will be the gross distribution of $12000 + earnings from it.

In Box 2a, will be the earnings from it only.

In Box 7, will be two codes “P” & “J”. 

I mentioned that based on my MAGI, some of the contributions, and thus earnings, were actually considered “allowed” and not excess so wouldn’t those earnings be taxed in 2021 as a normal distribution added to my MAGI? To which the rep replied, since I claimed everything as excess, the earnings would be added to my 2020 MAGI and taxed in that year. And that if I would have split it up correctly, I’d still be paying taxes on the earnings, just in two different years.

The rep even bounced this off his colleagues that came to the same conclusion.

B. The advice I’ve gotten on the forum are in the two following links. One of the links is from a post of mine, while the second was posted by another member.

My post w/ answer on p.1:

https://ttlc.intuit.com/community/retirement/discussion/re-made-excess-contribution-for-new-roth-ira...

Similar post w/ comparable answer on p.2:

https://ttlc.intuit.com/community/retirement/discussion/excess-roth-ira-contribution-made-in-2017-an...

Questions:

1. Are the brokerage firm reps or the advice from professionals on this forum, correct and why? For instance, is there any IRS documentation to support the advice provided? The brokerage rep indicated his reasoning is outlined in Form 8606, but didn’t cite any specific sections, and told me to provide it to the tax professional. That's a start but it's still vague. So, if it's spelled out somewhere that would give me the confidence to lean one way or the other.

2. The info that will be included in my 2021 1099-R for 2019 / 2020 with doesn't line up with how tax professionals on this forum are asking me to report my excess contributions + earnings. Let's assume that the guidance on this forum is the correct way to report everything. Would that mean I would need to speak with my brokerage firm to have them amend my 1099-R to reflect that?

Tacking on some additional context to the end that’s important:

Based on the advice in the links above, I started amending my returns in early March 2021. I submitted a 2019 amended federal return on March 1 reporting the $6k contributions & paying the 6% penalty. The IRS cashed the checked, but I’m still waiting to hear back on if it was accepted / rejected. No 2019 amended state hasn’t been filed yet as I still need to wait on the federal status. 

For 2020, both my federal / state were accepted in mid Feb 2021, but the excess contributions + earnings were not reported on them, nor was a second 2019 6% penalty (e.g. b/c I didn’t withdraw the 2019 excess contributions by Dec 31, 2020). 

My orig 2020 fed / state returns were submitted w/out them b/c that’s the I guidance I was given early on by my brokerage firm AND some TurboTax reps I spoke to over the phone. Only when I later learned of the newer info in the links above did I start amending my 2019 2020 returns. And I only made this last post about conflicting info when I was amending my 2020 federal return and called my brokerage firm to get my 1099-R info, and they informed the info on my 1099-R was different than how I was reporting it on my amended returns.

[macuser_22]

The answer I gave you previously is correct.

Your 2019 and 2020 contributions are separate and handled differently.

Your 2020 contribution was removed before the due date of your 2020 tax return so as long as the earnings attributed to the 2020 contribution was also returned then the 1099-R code PJ entered in the 2020 tax return will make it penalty free and only the earnings will be taxable income.

For the rules on this see https://www.irs.gov/publications/p590a

What if You Contribute Too Much?

A 6% excise tax applies to any excess contribution to a Roth IRA.

Withdrawal of excess contributions.

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with "Filed pursuant to section 301.9100-2" written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.

Your 2019 contribution (even though it was made in 2020 is still a 2019 contribution)  must be reported on your 2019 tax return. 

The due date for 2019 was April 15 (extended to July 15 because of COVID) 2020.   Because the 2019 contribution was not removed until 2021, it was beyond both the 2019 due date and extended due date so is cannot get the treatment quoted above for 2020 and the 6% excise penalty applies for 2019 that requires that a 2019 5329 be filed with the penalty.

That 2019 excess was also not removed in 2020 and it was NOT a 2020 contribution so the "remove by due date" rules do not apply.   Because that 2019 excess remained in the IRA the entire 2020 year then there is another 2020 excess that must be reported on another 2020 5329 form for the same 6% penalty a second time.

However, you do not report the earnings on the 2019 excess since removing the earnings only applies to the timely return of excess by the due date.   Earnings are not a contribution and when the 6% penalty is applied the earnings are immaterial.

(What many financial institutions seem to overlook is that a 2019 contribution made *in* 2020 is still a 2019 contribution so the 2019 excess rules apply and not the 2020 rules.)

I hope that explains it.

[uk05]

Thanks, @macuser_22.

Where I think some of the confusion lies is with the wording of Publication 590-A, which says “The earnings are considered earned and received in the year the excess contribution was made”. If interpreted literally it would mean earnings returned on excess contributions made in 2020 but attributed to 2019 would be associated with 2020. I think that’s where the brokerage firms and others like myself are being tripped up.

So if your conclusion that “a 2019 contribution made *in* 2020 is still a 2019 contribution so the 2019 excess rules apply and not the 2020 rules.”  is the correct way forward, I do have some additional questions:

1. Since this has caused confusion for so many, I’m just curious how you were able to get clarity on this over the years. Is it just experience filing similar returns, interacting with the IRS, etc.?

2. Do I need to contact my brokerage firm to update my 1099-R? In other words, does the IRS care if what I report in my amended returns differs from what my brokerage firm reported in the 1099-R b/c they will differ and I’m concerned this will spell red flags for them (a rejected return and/or an audit). I also imagine I’ll need to make good use of the interview section as well.

[macuser_22]

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@uk05 wrote:

Thanks, @macuser_22.

Where I think some of the confusion lies is with the wording of Publication 590-A, which says “The earnings are considered earned and received in the year the excess contribution was made”. If interpreted literally it would mean earnings returned on excess contributions made in 2020 but attributed to 2019 would be associated with 2020. I think that’s where the brokerage firms and others like myself are being tripped up.

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That is correct.    But it is not referring to a calendar year, it refers to the tax year.    The tax law allows 2019 contributions until the due date of the tax return so any 2019 contribution made before that due date is a 2019 contribution. 

It also says:

Earnings Includible in Income

You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not the year in which you withdraw them.

The year "in which you made the contributions" is 2019.

The wording is confusing because they do not explicitly say "calendar year" or "tax year".

The 1099-R instructions are more clear for reporting the excess.  The return of excess Roth contribution in 2020 requires a 1099-R with a code PJ in box 7 that means "taxable in 2019".   The taxable amount is in box 2a which is the earnings.   That can ONLY be reported on a 2019 tax return.

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.

[uk05]

I'm confused now by your comment:

The 1099-R instructions are more clear for reporting the excess.  The return of excess Roth contribution in 2020 requires a 1099-R with a code PJ in box 7 that means "taxable in 2019".   The taxable amount is in box 2a which is the earnings.   That can ONLY be reported on a 2019 tax return.

I thought I wasn't reporting any earnings for my 2019 allowed or excess contributions on my 2019 amended return b/c the 2019 tax deadline had already past (e.g. the excess correction form that triggered the distribution of all contributions + earnings for 2019 & 2020 was completed in Jan 2021). Thus, the distribution of 2019 earnings in 2021 would be taxed in 2021 as income.   Also, I amended my 2019 federal & added my 2019 allowed + excess contributions, which figured out the 6% penalty, which I sent in as a check w/ it. I'll then pay the same 2019 6% penalty once more on my amended 2020 federal since 2019 excess contributions weren't removed before Dec 31 2020.

Also, the other question I posed was does my brokerage firm need to update my 1099-R to reflect the guidance you're giving me?  What Fidelity is reporting is at the top of my original post.

[macuser_22]

Your previous comment confused me - I was answering your comment and not the original question. Your quote from the IRS pub refers to a "timely removal".  Your 2020 contribution was a timely removal so the earnings on the 2020 excess are reported in 2020 not 2021.

I was responding to that.  

Your 2019 excess was not removed until 2021 so it was not a "timely removal" so my above comment does not apply  to it.    The 2019 excess can only be removed as a regular distribution and not the earnings. 

[Confusedtax12345]

@macuser_22 

I'm in a similar situation. Made a roth contribytion for 2020 in January 2021. It was an excess contribution. I withdrew it and gain. Do I report it in 2021 or 2020?

I found this online: https://www.wolterskluwer.com/en/expert-insights/ira-reporting-excess-contributions-and-recharacteri...

It says report in 2021 is this wrong?

Thank you!

[macuser_22]

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@Confusedtax12345 wrote:

@macuser_22 

I'm in a similar situation. Made a roth contribytion for 2020 in January 2021. It was an excess contribution. I withdrew it and gain. Do I report it in 2021 or 2020?

I found this online: https://www.wolterskluwer.com/en/expert-insights/ira-reporting-excess-contributions-and-recharacteri...

It says report in 2021 is this wrong?

Thank you!

---

That article does not say to report it in 2021 - it says: If a contribution is made during one calendar year but removed in the following calendar year (before the tax-filing deadline, including extensions), report using Code P.    And code P on a 2021 1099-R means "taxable in 2020".       (A Roth will have code JP - J meaning Roth).

If a 2020 contribution returned in 2021 as a "return of contribution and earnings" then it will be reported to you on a 2021 1099-R box 7 code PJ that means taxable in 2020.  It would be entered on your amended 2020 tax return when you receive the 1099-R next January.

Entering a 2021 code JP in the 2021 TurboTax will tell you to amend 2020.

[Confusedtax12345]

@macuser_22 

Thank you. It was confusing because the article said for the example to use code 8 on the 1099R not P.

"John Johnson, age 45, made a $7,000 traditional IRA contribution for 2020 on January 10, 2021....removed it in 2021....

In our example of John Johnson’s $1,000 IRA excess contribution, the contribution was made and removed in the same calendar year and therefore the appropriate distribution code in box 7 of the 2021 IRS Form 1099-R is “8”. "

[macuser_22]

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@Confusedtax12345 wrote:

@macuser_22 

Thank you. It was confusing because the article said for the example to use code 8 on the 1099R not P.

"John Johnson, age 45, made a $7,000 traditional IRA contribution for 2020 on January 10, 2021....removed it in 2021....

In our example of John Johnson’s $1,000 IRA excess contribution, the contribution was made and removed in the same calendar year and therefore the appropriate distribution code in box 7 of the 2021 IRS Form 1099-R is “8”. "

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The wording is confusing.    Tax law allows you to make a 2020 IRA contribution *in* 2020 up to the due date of the 2020 tax return which is April 15 (now extended to May 17) 2021.    The law treats it as a 2020 contribution made in 2020.   Nothing about a 2020 contribution goes on a 2021 tax return. 

[uk05]

@macuser_22 

I only mentioned the quote from publication 590-A b/c you had mentioned it as supporting documentation for what I interpreted as both my 2019 & 2020 contributions in the orig post, but you're saying said publication is for a "timely" return only so that only applies my 2020 contribution only, which I understand.

Moving forward, the question I last posed, which still stands, is do I need to contact my brokerage firm & ask that they update the 1099-R they will send me AND the IRS in 2022? Or does the 1099-R not matter as long as I explain why I’m reporting my 1099-R a different way in the interview section?

As noted in the original post, the brokerage firm will report both the 2020 & 2019 contribution earnings as “timely”. As their retirement rep said, they think 2019 is also timely b/c the contribution was made in the 2020 calendar year (which you’ve already mentioned is incorrect and explained why) and I completed the excess contribution form before the 2020 tax deadline for it. They then provided the box 1, 2a & 7 details which I also listed in the original post. 

Thanks for your help on this one.

[macuser_22]

I apologize - I believe you are correct - if a contribution is made AND removed in the same calendar year use a code 8,  if made in one year and removed in the next year use code P.

@dmertz can you review this thread and straighten me out - I am finding conflicting information .

[dmertz]

Since the contributions were made in 2020 and were not returned until 2021, nothing about this is reportable with code 8.

The amount that you can request to be distributed as a return of contribution can be up to the entire amount of the contribution, not just the amount of the contribution that is excess.  If all of the contribution is returned, all of the associated earnings are part of the distribution of the returned contribution and are to be included in the gross and taxable amounts of the Form 1099-R that reports the distribution of the returned contribution.

To my knowledge, the IRS has never resolved the ambiguity that exists with regard to whether the deadline for obtaining a return of the 2019 contribution made in 2020 is the due date of the 2019 tax return or the due date of the 2020 tax return.  Over the years I've come to opposite conclusions on this, so I generally leave it up to the IRA custodian to decide.  Because section 219(f)(3) creates the legal fiction that a contribution made for the previous year is deemed to have been made on the last day of the previous year, my current leaning is that the deadline was the due date of the 2019 tax return, which differs from the treatment being provided by the IRA custodian in this case.  However, it's not clear that this legal fiction applies to section 408(d)(4) for a return of contribution.

[fanfare]

The moral of the story is, wait until after Dec 31 to know your exact income, and avoid excess contributions !

[macuser_22]

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@dmertz wrote:

  Because section 219(f)(3) creates the legal fiction that a contribution made for the previous year is deemed to have been made on the last day of the previous year, my current leaning is that the deadline was the due date of the 2019 tax return, which differs from the treatment being provided by the IRA custodian in this case.  However, it's not clear that this legal fiction applies to section 408(d)(4) for a return of contribution.

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Thanks.  That IRC reference is what I was looking for.    That seems to make it clear that  Congresses intent was that contributions made by the due date are to be treated as if they were made in the prior tax year. 

The IRS really needs to clearly say so in the pubs since even professionals get it wrong.  (Not everyone reads the actual law that is much clearer than the IRS.)