First discovered my issue about 2 weeks ago while doing my 2021 taxes. What I learned so far is the following:
Here’s my situation discovered while doing my 2021 taxes. I’m over 59 1/2.
Here are my misunderstandings when I reacted before having a decent understanding of the situation.
What I plan on doing. If anything sounds wrong here please let me know.
Here are my questions that I’m having trouble with. Note that I have TurboTax for 2019, 2020 and 2021. I ordered 2018 but it hasn’t arrived yet which is why some of my questions are about TurboTax. Waiting for 2018 TT before starting.
Thanks for any help
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1. Earnings are not subject to the 6% penalty. Only the excess contribution is subject to the 6% penalty. You will have a penalty for 2018, 2019, 2020, and 2021 because the excess contributions from 2018, 2019, and 2020 were not removed by December 31, 2021.
In 2018 you will just enter your contribution under Deductions & Credits and TurboTax will give you a warning about the penalty and create Form 5329.
In 2019 you will enter your contribution and your prior year’s excess contribution ($6,500) during the interview in the Deduction & Credit section. TurboTax will calculate the penalty on Form 5329.
In 2020 you will enter your contribution and your prior year’s excess contribution ($6,500 + excess from 2019) during the interview in the Deduction & Credit section. TurboTax will calculate the penalty on Form 5329.
In 2021 you will enter your contribution and your prior year’s excess contribution ($6,500 + excess from 2019 + excess from 2020) during the interview in the Deduction & Credit section. On the penalty screen, you will enter the 2021 contribution amount you plan to remove by the due date. TurboTax will calculate the penalty on Form 5329.
For example, on your 2020 return, the steps are:
2. You do not need to calculate the earnings for the excess contribution for the years 2018, 2019, and 2020. For the excess contributions from 2018, 2019, and 2020 you only need to remove the excess contribution amount as a regular distribution without the earnings. You will get a 2022 Form 1099-R next year and this will be entered on your 2022 tax return. Your code in box 7 will be either T or Q since it is a Roth IRA and you are older than 59 ½.
3. Yes, you can leave the earnings in the Roth account for the 2018, 2019, and 2020 excess contributions.
4. Yes, TurboTax will walk you through the amendment and it is similar to the interview when filing your taxes with TurboTax.
5. It depends on your state if you will have to amend your state as well. But TurboTax will walk you through this.
6. Yes, TurboTax will fill out Form 5329 Part IV for the excess contribution.
7. No, you will not need Form 8606 when you amend your returns.
8. Yes, this is how the 2018 5329 form will look
For the 2021 excess contribution, you have until the due date to request the withdrawal of the 2021 excess contribution plus earnings.
You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:
To create a 1099-R in your 2021 return please follow the steps below:
Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.
If you have any further questions please feel free to comment and we will be happy to assist you further.
1. Earnings are not subject to the 6% penalty. Only the excess contribution is subject to the 6% penalty. You will have a penalty for 2018, 2019, 2020, and 2021 because the excess contributions from 2018, 2019, and 2020 were not removed by December 31, 2021.
In 2018 you will just enter your contribution under Deductions & Credits and TurboTax will give you a warning about the penalty and create Form 5329.
In 2019 you will enter your contribution and your prior year’s excess contribution ($6,500) during the interview in the Deduction & Credit section. TurboTax will calculate the penalty on Form 5329.
In 2020 you will enter your contribution and your prior year’s excess contribution ($6,500 + excess from 2019) during the interview in the Deduction & Credit section. TurboTax will calculate the penalty on Form 5329.
In 2021 you will enter your contribution and your prior year’s excess contribution ($6,500 + excess from 2019 + excess from 2020) during the interview in the Deduction & Credit section. On the penalty screen, you will enter the 2021 contribution amount you plan to remove by the due date. TurboTax will calculate the penalty on Form 5329.
For example, on your 2020 return, the steps are:
2. You do not need to calculate the earnings for the excess contribution for the years 2018, 2019, and 2020. For the excess contributions from 2018, 2019, and 2020 you only need to remove the excess contribution amount as a regular distribution without the earnings. You will get a 2022 Form 1099-R next year and this will be entered on your 2022 tax return. Your code in box 7 will be either T or Q since it is a Roth IRA and you are older than 59 ½.
3. Yes, you can leave the earnings in the Roth account for the 2018, 2019, and 2020 excess contributions.
4. Yes, TurboTax will walk you through the amendment and it is similar to the interview when filing your taxes with TurboTax.
5. It depends on your state if you will have to amend your state as well. But TurboTax will walk you through this.
6. Yes, TurboTax will fill out Form 5329 Part IV for the excess contribution.
7. No, you will not need Form 8606 when you amend your returns.
8. Yes, this is how the 2018 5329 form will look
For the 2021 excess contribution, you have until the due date to request the withdrawal of the 2021 excess contribution plus earnings.
You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:
To create a 1099-R in your 2021 return please follow the steps below:
Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.
If you have any further questions please feel free to comment and we will be happy to assist you further.
Thanks DanaB27 for the answers and the quick reply! This information will come in handy once I begin this exercise!
Took me a while to digest this great information! Which leads me to a follow up question. For 2018, 2019 and 2020 since there aren't any earnings involved for the Roth IRA I assume this means there will be no changes that need to be made to my original 1040s for those years. Are 1040x (amended) returns still required for those years? Thanks
Please be aware, that the 6% penalty still applies for the excess contribution amounts from 2018, 2019, and 2020. If you had entered all the excess contributions in those years and the 6% penalty is correctly calculated on Form 5329 Part IV then you do not need to amend these years.
Please verify:
1.That you had entered the contribution on your 2018 tax return and got the penalty calculated on Form 5329.
2. That you entered the contribution on your 2019 tax return plus the excess contribution from 2018 and got the penalty calculated on Form 5329.
3.That you entered the contribution on your 2020 tax return plus the excess contribution from 2018 and 2019, and got the penalty calculated on Form 5329.
Have another question. I removed the $6500 from my Roth IRA for 2018. Where do I document that amount? Somehow I need to let the IRS know that the situation for 2018 has been corrected.
Thanks
You will receive a form 1099-R reporting the ROTH IRA distribution in the year following the distribution. It should be coded "8" in box 7 Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2022, for instance. That will tell the IRS that the excess contributions have been withdrawn.
Also, to comply with the distribution rules of the excess contributions, you just need to have adjusted your current year contributions to be under the allowed contributions for the current year, taking into consideration the balance of excess contributions going into the current year.
For instance, if you had $7,000 of excess contributions going into the current year, and you made no contributions for the current year, then you would by default have distributed the excess, assuming your limit on contributions for the current year is $7,000.
Thanks! Since for 2018 I was unable to do an Excess Removal and had to do a normal distribution, won't box 7 of the 1099-R have a code of 7 for 'Normal distribution'?
Yes, Box 7 of the 1099R should have a code 7 for a normal distribution.
Hoping this is my last question. Was wrapping up my 2018 amended return and making sure I signed everything. Noticed on page 2 of the 5329 form the signature section at the bottom of the page. The 5329 form says 'Sign Here Only if You Are Filing This Form by Itself and Not With Your Tax Return'. I had signed here but now wondering if I should print out an unsigned version instead. Thought it odd that it would indicate not to sign on the signature line. Thanks
You would sign the form if you were submitting this as a stand alone document. If you are sending an amended return, then this wouldn't be signed.
With this said, I don't think it will make much of a difference to the IRS. Since you are mailing the return, you may wish to put in a note and attach it with your amended return stating you accidently signed it before reading the instruction. I should suffice as it won't make a difference one way or another.
it's easier to print an unsigned copy
than to prepare a note, print that and attach to your return.
IRS says:
do not attach extraneous material to your tax return.
That's what I wound up doing. I actually had it already printed out trying to decide which was the proper route. Sent to the IRS about 30 minutes ago. Thanks for everyone's help!! This is a great forum!
I was informed by my financial services to report my excess 401k contribution in the 2021 tax filing but NOT the Earnings and to report the Earnings in 2022. They also told me I will get two 1099Rs in 2022, one for the excess contribution and the other for the earnings.
How to I file in 2021 without a 1099R?
I understand you have given us step by step to create our own 1099R for reporting in 2021. However, it asks for Entry under Box 1a to enter "Total Distribution" which includes both excess contribution and earnings; Under Box 2a; do I leave it blank for Earnings?
Appreciate the advice.
Thank you
You can enter the return of excess 401(k) deferrals in the Less Common Income section:
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