Incorrectly Coded Roth Excess Contributions on 2024 Return and Now Effecting 2025 filing – How to fix?

[tqdq]

We are currently working through a 2025 tax return and have discovered errors made while filing 2024 that are affecting 2025 return. Here is best effort to describe the situation:

• Husband and wife always file a joint return and have made Roth IRA contributions for several years
• While filing 2024 taxes (in February 2025) discovered that total income exceeded the income limit for making Roth IRA contributions in 2024, and consequently had created an excess contribution situation
• Contacted brokerage firm and backed out $8,000 each for husband and wife, plus approximately $1,100 of interest earned (so about $9,100 each)
• Brokerage firm sent letters explaining the removal of the 2024 excess and interest effective Feb 20, 2025, so the excess contributions were removed before April 15, 2025.
• Brokerage firm also indicated they would send a 1099-R in 2025 for these two transactions.
• Not knowing quite how to handle this situation on the tax return, we turned to the TurboTax community for assistance.
• Discovered several examples illustrating similar situations for which TurboTax experts offered two options:  1) Wait until the 2025 1099-R comes in, report the 2024 excess in 2025 and amend 2024 if needed; or 2) use the amounts we received from our broker, create manual 1099-R’s in TurboTax for 2024, and ignore the 1099-R’s when they come in
• We chose to create manual 1099-R’s in the TurboTax software and include in our 2024 return
• We entered gross distribution in Box 1, taxable amount in Box 2, left Box 2b unchecked, and there was no state or federal withholding amount. But we mistakenly used Distribution Code 8 in Box 7.
• Now we have received 2025 1099-Rs, both of which show gross distribution in Box 1, taxable amount in Box 2 and Distribution Codes of P and J in Box 7.
• Looking back at the 2024 return, the codes used in 2024 filing appear to have pushed the excess back to 2023.  And also it appears there was a 6% penalty in 2024, I'm assuming because the we used Distribution Code 8 in Box 7.  
• TurboTax is also offering to credit the Roth contributions to 2025 since the software thinks we didn’t remove the excess, I'm guessing because we used the wrong distribution codes on the self-created 1099-R’s.

So we need help.  Seems like we could amend 2024, delete the 1099-Rs entered manually and just report the new 1099-Rs for 2025.  Or we could file an amendment for 2024, modify the 1099-R’s to reflect the numbers on the 2025 1099-Rs, but neither of those scenarios seems to make fix the issues in TurboTax.

Thank you so much!

[tqdq · Accepted solution]

My apologies!   This sentence "Brokerage firm also indicated they would send a 1099-R in 2025 for these two transactions." should read "Brokerage firm also indicated they would send a 1099-R in 2026 for these two transactions."

[dmertz]

Had you entered into 2024 TurboTax a 2025 Form 1099-R with codes J and P instead of a 2024 Form 1099-R with code 8, the result would have been the same.  The each taxable amount of about $1,100 (box 2a) would be included on Form 1040 line 4b.

Code 8 only applies to the year of the Form 1099-R.  Code 8 cannot cause TurboTax to produce any effect on any other year's tax return.

However, the fact that your 2024 Form 5329 reported an excess Roth IRA contribution, in the IRA contribution entry section it seems that you failed to tell TurboTax that you would remove the excess Roth IRA contribution, so you need to amend to correct that.  Doing that in 2024 TurboTax you could also correct the Form 1099-R entries, taking care to indicate that the Forms 1099-R are 2025 forms, but that would not change the amount on Form 1040 line 4b unless you had entered an incorrect amount in box 2a.  (If you failed to mark the IRA/SEP/SIMPLE box, the approximately $1,100 times two would have mistakenly appears on line 5b instead of on line 4b, so you would want to correct the form entries so that the taxable amount appears on line 4b.  With code J present, the IRA/SEP/SIMPLE box does not need to be marked since the code J indicates that the distribution is from a Roth IRA.)

[tqdq]

Thank you, Dmertz, for the quick and detailed response!   The information you provided helps me understand several key issues better.  I am, however, struggling a bit to apply that new knowledge to specific action steps in TurboTax. 

I have begun the process of amending the 2024 return, and I have gone through the process of entering the 1099-R adjustments as you suggested, using the 1099-Rs for 2025 and have changed the distribution codes from 8 to J and P.  So far TurboTax shows the $960 penalties gone and coming back as a refund, and the Form 5329 now shows $0 penalty in Section 4, but the Form 5329 still shows a 2023 excess (which was not the case), a $0 excess for 2024 (which should be the case), and a carry forward of Roth contribution credits for 2025.  I feel like I must still have a wrong code somewhere but I've worked through the amendment several times and can't seem to clear that contribution credit for 2025.  To me, that makes it appear that somehow I still show in TurboTax that I didn't remove the excess in 2025, although I am certain we did.   

I appreciate your time and expertise, and would welcome any additional guidance or suggestions.  Thanks!

[dmertz]

An amount on line 18 of Form 5329 had to be either user-entered or carried in from your 2023 TurboTax file.  Examine line 10 of the IRA Information Worksheet in forms mode.  If the amount is shone there in green, it transferred in from line 11 of your 2023 IRA Information Worksheet.  If it's in blue, it's user entered.

"a carry forward of Roth contribution credits for 2025"

I'm not sure what you mean by that.  What line of what form or worksheet?

[tqdq]

Well there is not even a Form 5329 in the 2023 return, so it must be user-entered.  Also, I deleted my first amendment draft and re-entered numbers, ensuring that I found and entered the box for "removed excess contributions by April 15, 2025" and everything else reconciled.  I don't see the "Roth contribution credit" line anymore.   The numbers all look good and I plan to submit the amendment tonight!

Many thanks!