In 2021 I rec'd distribution from my Roth, for excess Roth contribution I made in 2018. I pd 6% excise tax on it 2018-2020. Is it taxable as ordinary income in 2021?

[korea500]

Also, I have attributed earnings distributed as well.  I understand what to do with the earnings.  My question is if the 2018 excess Roth distribution, returned in 2021 is taxable as ordinary income on 2021 return. (FYI - I meet no exceptions.).

[ThomasM125]

No, a distribution of principal from a ROTH IRA is not taxable, since the contribution was never deducted from your income.

@korea500

[korea500]

Thank you.

A follow-on issue: The 1099R only has gross distribution amount (which is equal to return of excess Roth contribution + attributable earnings). Box is checked for “Taxable amount is not determined”. Distribution code of “7”. This is a Roth originally with USAA and then Schwab took it over. Even if you provide Schwab with the breakdown of return of excess contribution vs attributable earnings, they prepare the 1099 R this way.  If I enter it into Turbo Tax this way,  the attributable earnings (AE) doesn’t  get the 10% tax on 5329, AE also don’t show up on page 1 of 1040 as taxable.  Any suggestions on how to enter so that it properly reports the AE on 5329 and as taxable income? 

[fanfare]

"Any suggestions on how to enter so that it properly reports the AE on 5329 and as taxable income? "

enter the amount you determined to be taxable  ( AE ) in that box 2a and clear the box "taxable not determined".

the same amount should end up on 5329 Line 1 if you are under age 59 1/2.

BUT, for Roth IRA distributions, see instructions.

[fanfare · Accepted solution]

@korea500 

Change the distribution code from 7 to "J".

[ThomasM125 · Accepted solution]

The form 1099-R as you describe shouldn't show as taxable on your tax return. So, you can enter it so the IRS will be able to match it up with their copy. Then, prepare a substitute form 1099-R to report the taxable earnings and penalty.

You would make an entry for a substitute form 1099-R and put the withdrawal amount in box 1 and the earnings in box 2(a). You will see an option to create a substitute form 1099-R on the screen that says Tell Us Which 1099-R You Have when you go to enter the form 1099-R. Code the substitute form 1099-R as "8" in box 7, for excess contributions plus earnings and a code "J" which will result in the penalty being reported on form 5329.

[korea500]

Thanks.  I previously tried this, but it didn’t  work.  I am 59.5 at year -end, but I had not yet reached 59.5 when  I pulled it out, which I understand to be the marker for return of excess Roth contribution.

[korea500]

Thanks.  I have previously tried that but it didn’t work.  

[korea500 · Accepted solution]

This sounds like a good solution.  I basically had tried this by entering two separate 1099Rs for Schwab with one being the return of excess Roth Contribution and the other being AE.  I also used the codes you mentioned.  It did work.  But the solution you provided seems more appropriate. Thanks for all who answered for their time. 

[korea500]

Thank you for answering.

[korea500]

Hey Thanks,

I just tried this again and changed the code to J.  It worked.

Thanks!  

[korea500]

In my original inquiry I said the 1099R had a “7” in Box 7.  It is actually a “T”.

If I put the 1099R in as issued by Schwab and then also prepare the Substitute 1099R so that the return includes AE as taxable on 1040, page 1, and also receives 10% penalty the return actually looks fine  , but the supporting schedules then show my total Roth contributions being reduced by the amount of the full amount of the Schwab 1099R.  This is incorrect of course because part is return of excess contribution from 2018 and also AE. 

Is there a better way to enter this so all items are correct?

[DanaB27 · Accepted solution]

Please be aware, since you withdrew the 2018 excess contribution after the due date of the 2018 tax return and paid the penalty each year you were not required to withdraw the earnings and you will enter this as a regular distribution. There is no need to split up the earnings and return of contribution. 

Since this is treated as a regular distribution it will reduce your net contribution amount (all contributions minus distributions) after this tax year.

After you enter the 1099-R as shown on the form into TurboTax please answer the follow-up questions in TurboTax carefully in regards to the Roth IRA.

1. Click on the "Search" on the top and type “1099-R”
2. Click on “Jump to 1099-R”  and enter your 1099-R
3. Click "continue" after all 1099-R are entered and answer all the questions.

Please review this article What happens if I made an excess Roth IRA contribution for additional information.

@korea500

[korea500]

Thank you.  But wouldn’t I still have an early distribution penalty of 10% for the portion of the distribution that exceeds return of excess contribution from 2018?

I was not 59 1/2 in 2021. 

What am I not understanding?

[DanaB27 · Accepted solution]

No, you don't have to pay the 10% penalty since it is now a regular distribution. As a regular distribution, you first withdraw the contributions which are always tax- and penalty-free. Then earnings are only taxable if it isn't a Qualified Distributions in 2021.

It seems as if you had enough contributions therefore your earnings are not touched and you do not have to pay the 10% penalty.

You left it in the account for all those years and paid the 6% penalty.

@korea500