excess Roth IRA contributions

[gjgogol]

i think i am in a pickle.  My wife and I contributed $7K each to a roth IRA for 2021 tax season. We also contributed $14K each to a roth ira for 2022 tax season. I have already filed my 2021 return and did not report the contribution in TT. I have yet to submit my 2022 tax return.  I just learned that our MAGI for both 2021 and 2022 tax seasons exceeded the allowed threshold. what do I need to do to fix this situation? 

[fanfare]

ask your custodian for the form "return of excess plus earnings" for 2022 contribution.

It is too late to do that for 2021 contribution since it is past the due date of your 2021 tax return.

you need to use  a different procedure to unwind that one.

@gjgogol 

[fanfare]

do you have a balance in your traditional IRA that exceeds your IRA basis?

if your answer is NO, you can try for a backdoor Roth conversion on your 2022 cotribution.

@gjgogol 

[DanaB27 · Accepted solution]

As fanfare mentioned you can request the return of the excess contribution plus earnings (by the due date) to avoid the 6% penalty for the 2022 excess contribution. Other options are listed here: What happens if I made an excess Roth IRA contribution.

For the 2021 excess contribution, you will request a regular distribution (without earnings) since the extended due date of the 2021 return has passed.  You will get a 2023 Form 1099-R with code J and this belongs on the 2023 tax return. Make sure you include the 2021 excess in the net contribution amount prior to 2023 when TurboTax asks in the follow-up questions.

You will need to amend your 2021 tax return to add the 6% penalty. Please enter the Roth IRA contribution and TurboTax will automatically calculate the penalty on Form 5329.

You also will have to pay the 6% penalty on your 2022 return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Continue and answer "Yes" on the "Do you have any Excess Roth Contributions" 
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021.

On the 2023 tax return, the excess will be resolved when entering the 2023 Form 1099-R with code J (regular distribution of the 2021 excess).

@gjgogol 

[gjgogol]

@fanfare  thanks for the info.  I really don't know what will be left. :(  As a first step the custodian wants to pull the funds and reinvest in a mutual fund.  Will pulling the funds from Roth IRA be considered a withdrawal? Should I open up a traditional IRA to put it into?  I neglected to mention in my original post is that my wife and I are 68, my wife is still working and I am retired.  Does that affect how things are handled?

[gjgogol]

@ DanaB27   Regarding your statement, "You also will have to pay the 6% penalty on your 2022 return:", I will have the pay 6% penalty on $14K for 2 years even though my contribution for 2021 was made in Dec 2021? Also, for 2022 return do I use only $14K or the $14K plus any gains/losses?

[DanaB27]

Yes, you will have the 6% penalty on the 2021 and 2022 tax returns (for the 2021 excess contribution) since it wasn’t removed until 2023. 

You will only use the 2021 excess contribution amount as the prior year's excess contribution on your 2022 tax return ($7,000 for you and $7,000 for your spouse).

Yes, pulling the fund from your Roth will be a withdrawal. Please make sure that for the 2022 excess contribution, you request the withdrawal of the excess contribution plus earnings to get the correct Form 1099-R issued. The earnings will be taxable.

And make sure to request a regular distribution of $7,000 each for the 2021 excess to get the correct Form 1099-R since you are over 59 1/2 it will be either code T or Q.

Yes, if you have enough taxable compensation then you can put the 2022 excess in a traditional IRA. You would request a recharacterization instead of withdrawing the 2022 excess.

@gjgogol 

[gjgogol]

@DanaB27 I am cashing out of my roth IRA for both 2021 and 2022 contributions. I walked thru the TT form and it ended up creating a form 5329 Additional Taxes on Qualified Plans that calculates the penalty. As part of that form it asks for the VALUE of my roth IRA as of December 31, 2022 which includes both my 2021 and 2022 contributions correct?  Apparently it looks like I will only be paying a penalty for one year since I will be cashing in before the 2022 tax year deadline. Does that sound correct to you? Will I be paying a 2022 6% penalty for my 2021 excess contribution when I file for my 2023 taxes?

Also, since I am including my 2021 contribution as part of my Form 5329, why will I need to do a 2021 amended return?  TT software did not address that as far as I know.  I would think the software would tell me to also file an amended 2021 return as well as submiting a Form 5329...bad assumption?

[DanaB27]

No that doesn't sound correct. You don’t have to pay the 6% penalty on your 2022 tax return for the 2022 excess since you are removing the excess and earnings before the due date (or recharacterizing it). But you will have to pay the 6% penalty for the 2021 excess on your 2022 tax return since it was not removed by December 31, 2022.

When TurboTax asks about the value on December 31, 2022, including any contribution for 2022 made in 2023. Then you will enter the value on December 31, 2022, plus any contribution for 2022 made in 2023. If you didn’t remove the excess until 2023 then there should be a value in your account on December 31, 2022. 

No, since you are removing the 2021 excess in 2023 you won’t have to pay the 6% penalty on your 2023 tax return. Next year, you will enter the 2023 Form 1099-R with code J and this will show that you removed the excess from prior years.

To confirm, you didn't enter the Roth IRA contributions for 2021 on your 2021 tax return? You have to enter the Roth IRA contribution for 2021 on your 2021 tax return and then TurboTax will automatically calculate the 6% penalty on your 2021 Form 5329 part IV. Therefore, you will need to amend your 2021 tax return to pay the 6% penalty on your 2021 tax return for the 2021 excess. Please see How do I amend my federal tax return for a prior year?

If you decide to withdraw the excess contribution for 2022 plus earnings then please be aware the earnings will be taxable on your 2022 tax return.

@gjgogol 

[gjgogol]

@DanaB27 To answer your question: 

"To confirm, you didn't enter the Roth IRA contributions for 2021 on your 2021 tax return? You have to enter the Roth IRA contribution for 2021 on your 2021 tax return and then TurboTax will automatically calculate the 6% penalty on your 2021 Form 5329 part IV. Therefore, you will need to amend your 2021 tax return to pay the 6% penalty on your 2021 tax return for the 2021 excess."...I did not enter the Roth IRA for 2021 on my 2021 tx return. I read that I did not need to report Roth contributions because the IRA contributions will be reported on Form 5498 by the custodian for information purposes.  As I was completing my 2022 TT return, it asked me about prior excess contributions and I inserted $7K for me and $7K for my wife. It appeared that TT automatically created Form 5329 showing a 6% penalty of $420 ($7K x 6%). If TT is already showing a penalty/tax for my 2021 excess contribution, do I still need to amend 2021 return?

"If you decide to withdraw the excess contribution for 2022 plus earnings then please be aware the earnings will be taxable on your 2022 tax return."...how will I show what my earnings are on excess 2022 contribution? Will TT calculate the earnings to be taxed based on the value I input?  Or will the custodian need to provide a revised 1099 to me?

One more question, My wife and I have a couple of small IRA accounts (both traditional and roth) in addition to the roth IRAs identified above, BUT with a different custodian. They were created 20 years ago with no activity other than earning some interest over the years. Should the values of those IRAs be included when TT asks for the value of my Roth IRAs? 

[DanaB27]

Yes, you will include the value of all Roth IRAs (for the IRS all Roth IRAs are considered one account). You will also enter all of your net contributions (from all of your Roth IRAs) when TurboTax asks (next year on your 2023 tax return).

You will need to pay the 6% penalty for the 2021 excess twice, once on your 2021 return and once on your 2022 return. Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. You didn’t remove the excess until 2023 therefore you will have to pay the 6% penalty on the 2021 excess on your 2021 and 2022 returns.

You seem to have entered the 2021 excess correctly on your 2022 tax return and see the 6% penalty. Now you will have to amend your 2021 tax return to add the Roth IRA contribution to create Form 5329 and get the 6% penalty calculated.

Your custodian will provide you with a 2023 Form 1099-R with codes P and J for the withdrawal of the 2022 excess contribution plus 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.

Please make sure that the 2021 excess is withdrawn as a regular distribution without any earnings. This 2023 Form 1099-R should have code J and will be entered on your 2023 tax return.

[Edited 4/3/2023| 9:58 am PST]

@gjgogol

[gjgogol]

@DanaB27 I spoke with my financial advisor and they are suggesting that for 2022 Roth IRA contribution that I made in January of 2022 that I withdrawal the funds before I submit my 2022 taxes and then I will not have to report anything for 2022 in regards to Roth IRA contribution...reason being is that by withdrawing the funds before I submit my return it will be as though I never made an excess contribution and therefore should not have to report anything for 2022 in regards to the contribution. Is this correct?

[DanaB27 · Accepted solution]

Yes, if you withdraw the excess contribution plus earnings before the due date then you don't have to enter the IRA contribution into TurboTax. But the earnings on an excess contribution for 2022 will be taxable in 2022 and need to be reported on your 2022 tax return.

@gjgogol 

[gjgogol]

@DanaB27 REALLY thank you for your help.  And for my "dumb" 2021 excess roth IRA contribution which I never reported I need to 1) withdraw it now before I submit my 2022 tax return, 2) submit an amended 2021 tax return reporting the excess contribution, and 3) report it and the withdrawal via TT on my 2022 tax return; correct?

[DanaB27]

Yes, you will request a regular distribution (without earnings) for the 2021 excess contribution. You will get a 2023 Form 1099-R with code J (or if you are 59 1/2 and older then it will be code T or Q) and this will be entered next year on your 2023 tax return.

Yes, you will need to amend your 2021 tax return to pay the 6% penalty (enter the IRA contribution and TurboTax will calculate it automatically).

@gjgogol