Excess ROTH IRA Contribution

[Rohit_S]

I need clarification on how to handle excess ROTH IRA contribution for tax filing. I have gone through similar posts but I have found conflicting answers. I contributed $1000 in December 2020 for the year 2020 in my Roth IRA account. I realized in January 2021 that I was not allowed to put this money  due to the income limit. I pulled out the excess contribution including any earnings in February 2021 (Before May 17- the 2020 tax year filing due date). I did withhold Federal and State taxes when I made the request of pulling out excess contribution and earnings. I went on and filed my taxes in April 2021 and Turbo tax did inform me that I was not allowed to make such contribution. Upon which, I answered the question that I will take the excess out including any earnings by May 17, 2021 because I had taken out the excess & earnings in February itself.

Now, I have received 1099-R (with Year 2021) in January, 2022 for the excess contribution I made in 2020 with the Code J, P in Box 7.  I also see the Federal and State taxes withheld amount on the 1099-R form.  My question is do I need to go back and amend my 2020 tax return with this 2021 1099-R I have received? OR I will enter this 2021 1099-R with my 2021 tax filing? What I have understood from previous posts is that if you withhold federal and state taxes when you take the excess contribution out including any earnings, you do not need to amend the previous year tax return because the taxes were withheld in the current year which now need to be included with current tax year filing, is this correct? Please confirm.

[FangxiaL]

Q: Do I need to go back and amend my 2020 tax return with this 2021 1099-R I have received? 

Yes, you need to go back and amend your 2020 to report the earnings because the earnings are included in the taxable income for the year the excess contribution was made (2020).

Follow the steps here to amend your 2020 return:

1. Sign in to TurboTax
2. Scroll down to Your tax returns and documents, select 2020, then Amend (change) your return
3. Enter the code JP 2021 Form 1099-R into 2020 TurboTax and telling 2020 TurboTax that it's a 2021 Form 1099-R will cause TurboTax to properly treat the amount in box 2a as taxable and subject to an early distribution penalty. If the box 2a amount was not already handled this way on your 2020 tax return. 

Q: OR I will enter this 2021 1099-R with my 2021 tax filing? 

Yes, you are correct. you need to file your 2021 1099-R with your 2021 tax return because there is tax withheld when you withdrew the excess contribution. BUT you do need to go back and amend your 2020 tax return to report the earnings on the excess contribution. 

For help on how to enter 1099-R, see this article. 

[Rohit_S]

Thank you @FangxiaL  for your reply. 

I have a follow up question. In your reply to my Question-1, you mentioned in #3 "If the box 2a amount was not already handled this way on your 2020 tax return"- Could you please shed more light on this comment? I did  mention excess contribution in my return and Form 5329 was generated as part of 2020 tax return. This 5329 form does mention the taxable earnings ( In line 1 as early distributions) and additional tax 10% in line 4. Is that what you mean by handling in 2020 return? Can I say if form 5329 was generated as part of 2020 tax return, this means it was handled? I did not create a placeholder 1099-R form as suggested in other posts on same topic, if that is what you meant by handle. 

Based on your response it looks like I would need to amend 2020 return with the 2021-1099-R i have received. And, I would need to add the same 2021 1099-R in my 2021 return as well. Is that Correct? 

Thank you again for your response.

[FangxiaL]

Q: I did not create a placeholder 1099-R form as suggested in other posts on same topic, if that is what you meant by handle. 

Yes, this is what I meant by handle.

Since you withdrew the excess contribution before the due date last year, you could have created a 1099-R form while preparing your 2020 tax return to avoid amending your 2020 return after you received your 2021 Form 1099-R. 

Since you did not handle the excess contribution on your 2020 taxes, now you need to amend your 2020 tax return to report the earnings reported in box 2a of 1099-R form. 

Q: I would need to add the same 2021 1099-R in my 2021 return as well. Is that Correct? 

Yes, you are correct. Since the taxes on withheld in 2021, you need to include your 2021 Form 1099-R on your 2021 tax return so that you can get credit for taxes paid, either to lower your tax liability or receive a refund.

@Rohit_S

[Rohit_S]

@FangxiaL  Thank you again. 

I only have one last question I promise. While amending my 2020 tax return and adding 1099-R to report my earnings from box 2a, will I also mention federal and state tax withheld amount in 2020 return? Or will I mention Federal and State tax withheld amount in 2021 return only since it was withheld in 2021? I very much appreciate your reply to this. Thanks again! 

[FangxiaL]

Q: will I also mention federal and state tax withheld amount in 2020 return?

No, only report the earnings on your 2020 amended tax return to pay tax and penalty on the earnings part.

Q: Or will I mention Federal and State tax withheld amount in 2021 return only since it was withheld in 2021?

Yes, you only mention Federal and State taxes withheld amounts in your 2021 tax return ONLY since the withholdings took place in 2021 and only impact your 2021 taxes. 

[Rohit_S]

Thank you @FangxiaL  for your response on this. I am clear now!