My wife over-contributed to a Roth IRA in 2019 (we got married and our income put us over the qualif. limit). What are the best options to avoid penalties when filing?

[DianeC958]

Remove the excess contribution and any earnings before you file your 2019 tax return.

On your 2019 tax return to account for the earnings follow the instructions below.

Under Federal Taxes- Wages and Income- Retirement Plans and Social Security- 1099-R:

• Find the custodian's address and EIN (should be easy for large institutions)
• Box 1- the total amount that came out, including the earnings
• Box 2a- the taxable earnings
• Box-7 Enter Code P (and Code J if under 59 1/2).
• After entering the 1099-R, you will be asked for the year of the tax form. You would select 2021. (Code P means taxable in the year before the form.)

This accounts for any earnings on your 2019 so you do not need to amend it after you receive the 1099-R for 2020.

You do not want to enter the amount of the excess contribution into TurboTax if you remove it before you file your return.  Then the program will not charge a penalty for excess contribution.

[Ereese17]

Thanks! So to confirm we can avoid any penalties or fees for an early withdrawal of the account by doing the following?  We have not filed yet.

 - Withdraw the 2019 contribution (and any earnings from the account for 2019).
-  We will then receive a 1099-R from the banking institution for this withdrawal.
-  We file with Turbo Tax, but only need to report the earnings from this 2019 withdrawal amount.

Thanks again, and this is the sticky part I'm trying to figure out.  We obviously do not want to get dinged with any sort of penalties.

[DanaB27]

Yes, to avoid the excess contributions tax:

• withdraw the 2019 excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• withdraw any income earned on the 2019 excess contribution.

Yes, you will receive the 1099-R in 2021 from your banking institution. 

Yes, you will enter the removal of the excess contribution plus earnings into TurboTax like DianeC958 mentions above. When you get the form 1099-R in 2021 you can ignore it unless it shows federal tax withheld. 

[Ereese17]

Thanks! I have one more clarifying question.  You mention I will receive the 1099-R in 2021 from my banking institution, so does that mean for filing the taxes this year (for 2019) I do not have to input any forms, etc related to the Roth IRA?  I had assumed that because the excess contribution + earnings were for the 2019 year, that I would need to file that information for this year's tax return?

[DanaB27]

Yes, you are correct the excess contribution + earnings were for the 2019 year, and therefore you would need to file that information for the 2019 tax return.

You will receive the 1099-R in 2021 and the form will say 2020 on it but because of the P-code will be taxable in 2019. Therefore you have two options:

• Create the 1099-R in your 2019 tax return like DianeC958 mentions above. Then you can ignore the 1099-R when it comes in 2021 and you file your 2020 taxes. The only exception would be if form 1099-R shows federal withholdings then you would still need to enter it on your 2020 tax return.
• Not create a 1099-R right now and wait until you get the actual form 1099-R in 2021. Once you get the form then you will have to amend your 2019 tax return to include it.