Excess contribution to my ROTH IRA for 2022. What should I do now to avoid penalty?

[DanaB27]

You will have to request the withdrawal of the excess contribution plus earnings by the extended due date. Then you can avoid the 6% penalty and can enter on the penalty screen that you withdrew the excess contribution amount by the due date (IRA contribution interview).

Or you can request the recharacterization of your Roth contribution to a traditional IRA (if you only have an excess because of the Roth MAGI limit). 

Please see What happens if I made an excess Roth IRA contribution for additional information.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 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 2022?"
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 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

You will enter the recharacterization when you enter the contribution to the Roth IRA 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

[camvan]

Thank you so much for your detail explanation.

I just got off the phone with my bank and I have submitted the Recharacterization form to move from ROTH IRA account to my traditional IRA.

They told me even after the form submitted, the action might not get completed by tomorrow 4/18 because they are backed up with all IRA requests from everyone.

My question:   Do I need to submit "extension" for my tax return until I can confirm the transaction actually happened?

[DanaB27]

Yes, you might want to submit an extension if you don't know the earnings so you can fill out the explanation statement correctly. 

Please see How do I file an IRS tax extension? Please be aware,  an extension does not give you extra time to pay your taxes, which are due on April 18.