How to report several excess Roth Contributions

[cwcurrier]

@DanaB27 

I am old enough to make catch up Roth IRA contributions.

1. On March 30, 2020, I made a prior year (2019) contribution of $7,000 to my Roth IRA.
2. A few days later, on April 3, 2020, I made a current year (2020) contribution of $7,000 to the Roth IRA.
3. In calendar year 2021 I made two contributions to the Roth IRA in the total amount of $7,000.
4. On October 13, 2022 I made another $7,000 contribution to the Roth IRA.

The problem is that within minutes of making that 2022 contribution and purchasing stock shares my skin began to crawl with the thought that something was amiss. There was. Pub 590a revealed that because neither my joint-filing wife nor I had earned income after 2018, all of these contributions were excess contributions.

5. The market still being open on October 13, 2022,  I immediately sold the shares purchased a few hours earlier, calculated the earnings attributable to the contribution portion and withdrew the combined value of contribution + earnings.

Fast forward. I am now in TurboTax (been using for many years) to do 2022 taxes and imported from Fidelity a 1099-R  with a code T in box 7. This is the first time having to deal with this issue and could not find my way around TT and searched the TT Community. I found many variations on the theme that seemed close to being analogous, but offered varying solutions, leaving me without a clue as to how to properly proceed. Can you help?

[DanaB27]

You will have to pay the 6% penalty for each year that the excess stayed in the account:

• On your 2019 tax return, you will pay the 6% penalty for the 2019 excess contribution.
• On your 2020 tax return, you will pay the 6% penalty for the 2019 + 2020 excess contribution.
• On your 2021 tax return, you will pay the 6% penalty for the 2019 + 2020  excess contribution.

Please see How do I amend my federal tax return for a prior year?

Technically, you only had to remove the earnings for the 2022 and 2021 excess contributions since the other excess contributions were removed after the due dates. For the 2022 and 2021 excess, you should have requested the withdrawal of excess contributions plus earnings to get the correct codes in Form 1099-R. The earnings for the 2021 excess belong on the 2021 tax return on a form 1099-R with code PJ and the earnings for the 2022 excess belong on the 2022 tax return with Form 1099-R code 8J.

It seems you got a regular distribution for the full amount. And you might want to check with your financial institution if this can be corrected.

On your 2022 return, you will enter your Form 1099-R and this will show that you removed the excess on Form 5329 line 20:

1. Click "Wages & Income" (under Federal) on the left
2. Scroll down and click "Show more" next to "Retirement Plans and Social Security"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 

If you had the Roth IRA for 5 years then it won't be taxable since it is a Qualified Distribution.

You also will enter the excess contributions from prior years so it will be entered on line 18 of Form 5329:

1. Click “Deductions &Credits” on the left
2. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 and 2019.

[cwcurrier]

Hi @DanaB27,

Thank you for your prompt reply! I do need some clarification, though, regarding the statement that I “only had to remove the earnings for the 2022 and 2021 excess contributions since the other excess contributions were removed after the due dates.”

First, of the four excess contributions listed in me query, only one was removed -- the 2022 contribution along with its attributable earnings. NONE of the prior contributions have been removed, because I am unsure of how to proceed on that point in TT.

Second, I am under the impression that all earnings from all excess contributions must be removed. Is this not true?

All else makes sense to me at this point, and, yes, I did get a regular distribution for the 2022 excess removal and its attributable earnings. My online request for a withdrawal from my Roth was not questioned.

Again, thanks for the reply and I look forward to the clarification on the above.

Best regards,

[AmyC]

1. Your tax return for this year will need to reflect all of the excess contributions and their earning in your account for the 6% penalty.

2. True. There is no age limit to contributing to an IRA but there is an income requirement. Therefore, all of the excess contributions must be removed with their earnings. 

However, let's clarify what is an an excess contribution. You will need to know the amount of ROTH withdrawn from the accounts for each year you over-contributed.

You have read Pub 590a but let's review this section which states:

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

Excess contributions.

These are the contributions to your Roth IRAs for a year that equal the total of:

1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed); plus
2. Any excess contributions for the preceding year, reduced by the total of:
   1. Any distributions out of your Roth IRAs for the year, plus
   2. Your contribution limit for the year minus your contributions to all your IRAs for the year.

[DanaB27]

To add to what Expert AmyC said, you only need to remove the earnings if you make the withdrawal of the excess contribution before the extended due date of the return. If you remove the excess after the extended due date, then you can leave the earnings in the account and only take a regular distribution.

Here is my updated answer after the information you provided:

If you requested the withdrawal of excess contributions for 2022 plus earnings then you should have received a 2022 Form 1099-R with codes 8 and J (since you remove the 2022 excess in 2022) not code T. You can check with your financial institution.

But you might be able to use the regular distribution reported on your 2022 Form 1099-R with code T to reduce the 2022 penalty of 2019, 2020, and 2021 excess contributions. And then you would make the correct request for the 2022 excess contribution plus earnings to get the correct 2023 Form 1099-R with codes P and J (because it will be removed in 2023).

First, on your 2022 tax return, you will enter the prior year's excess contribution (this will show on line 18 of Form5329):

1. Click “Deductions &Credits” on the left
2. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021, 2020, and 2019.

You will enter the 2022 Form 1099-R with code T to show the regular distribution (this will also be entered on line 20 of Form 5329 and will reduce your excess contribution):

1. Click "Wages & Income" (under Federal) on the left
2. Scroll down and click "Show more" next to "Retirement Plans and Social Security"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 

You won’t enter the Roth contribution for 2022 in the IRA contribution interview if you remove it by the extended due date, make sure you request the withdrawal of excess contributions plus earnings and that they know they will have to issue a 2023 Form 1099-R with codes P and J. The distribution amount (excess contribution amount plus earnings) will be in box 1 and the earnings will be in box 2a. This will have to be reported on your 2022 tax return and therefore you will need to amend your 2022 return when you get the form in 2024.

Then you will have to look at line 24 of your 2022 Form 5329 and see how much excess contribution you have left in the Roth IRA. You will then request this amount as a regular distribution (without earnings) and will get a 2023 Form 1099-R with code T. This will be entered next year on your 2023 tax return.

You will have to pay the 6% penalty for each year that the excess stayed in the account:

• On your 2019 tax return, you will pay the 6% penalty for the 2019 excess contribution.
• On your 2020 tax return, you will pay the 6% penalty for the 2019 + 2020 excess contribution.
• On your 2021 tax return, you will pay the 6% penalty for the 2019 + 2020 + 2021 excess contribution.

@cwcurrier 

[cwcurrier]

@DanaB27, @AmyC 

I think this may be workable, but please give me some time to digest it fully. After the weekend I will try again to speak to a real person at Fidelity regarding a new 1099-R. If I understand the Pub 590a definition of "Excess Contribution" correctly (thank you, @AmyC ) , my 2022 contribution plus earnings having been removed in 2022 would not be treated as an "excess contribution." I think (?) that might give me some room to amend the 2021 and 2020 errors this year (2023). Thoughts?

cwcurrier

[DanaB27]

Yes, if you remove the 2022 excess contribution plus earnings before the extended due date (October 16, 2022) then you won’t have an excess contribution for 2022 and won’t have to pay the 6% penalty.

Yes, once you have taken care of the 2022 excess then you have time to focus on the prior years.

Just be sure that all excess is removed by December 31, 2023, to avoid paying the 6% penalty for another year.

If you have any further questions, we will be happy to help you.

@cwcurrier

[cwcurrier]

@DanaB27  @AmyC 

Good news! I received my corrected 2022 1099-R showing the 8J distribution code and the correct gross and taxable amount on the excess contribution's earnings, so I am ready to finish my 2022 return before tax day. According to Pub 590a, the distribution will not be treated as an "excess distribution" because it and related earnings were withdrawn during the tax year of the contribution (2022) and has been reported correctly by the corrected 1099, so all is good. Thank you both for getting me successfully to this point!

However, I think reading so many posts on this issue has confused and scrambled my brain to the point that once I enter the corrected 1099 into TT, I might need step-by-step guidance in navigating TT from that point forward. Anything you can offer in that regard would be greatly appreciated.

Best regards,

@cwcurrier

[DanaB27]

You will enter your 2022 Form 1099-R with codes 8 and J on your 2022 tax return with the steps below. 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Enter your Form 1099-R and continue through the questions.
5. On the "Your 1099-R Entries" screen click "continue"
6. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings from box 2a under "Another reason" if you are over 59 1/2

In the IRA contribution interview, you don’t need to enter the Roth contribution since you removed it and the earnings before the due date. Another option is to enter the Roth contribution for 2022 and enter the $7,000 contribution as removed by the due date on the penalty screen.

You will have to enter the excess contributions from 2019, 2020, and 2020 to pay the 6% penalty:

1. Click “Deductions &Credits” on the top
2. Click "I'll choose what to work on"
3. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
4. Select “Roth IRA”
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2019, 2020, and 2021. 

Please remove the excess contribution from 2019, 2020, and 2021 from your Roth IRA as a regular distribution (without earnings) to avoid paying the 6% penalty in 2023.

@cwcurrier