Over-contributed to IRAs, caught it, withdrew the excess from my Trad. TT assumes it came from the Roth

[drlynn]

I have two IRAs, a traditional/rollover and a Roth.  I accidentally over contributed last year. Caught it, withdrew the excess from the traditional, bringing my net traditional contributions to $0. When I indicate in TurboTax that I withdrew the excess, it assumes it came from the Roth and still gives me credit for the contribution to the traditional. How to I change it to reflect reality? Or do I have to wait and amend the return once I get the 1099R from the bank?

[DanaB27 · Accepted solution]

Usually, the rule is if you contribute to both a Traditional and Roth IRA in the same year, the excess is deemed to have occurred in the Roth IRA and you will have to remove the last contribution made to the Roth IRA.

Since you already withdrew the traditional IRA contribution the only way to indicate that in TurboTax is to not enter the traditional IRA contribution under Deduction & Credits.

You will get a 2021 1099-R in 2022 with codes P and 1 (if you are under 59 1/2 otherwise it will be 7) for the withdrawal of excess contribution plus earnings. This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 1099-R  2021 in 2022 and amend your 2020 return or
• You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2020?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter P and 1 (if you are under 59 1/2 otherwise it will be 7)
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[dmertz]

If you were over age 59½ at the time of the distribution, the 2021 Form 1099-R reporting the return of contribution from the traditional IRA will have codes P and 7 (or code P by itself) instead of codes P and 1.  Your age at the time determines whether or not any attributable  earnings distributed with the returned contribution are subject to a 10% early-distribution penalty.