Over payment to Trad IRA that already converted to Roth IRA

[eyeballjames]

I did not realize I made excess contribution to my Trad IRA until now but it has already been converted to Roth IRA and I received 1099-R for the conversion.  What to do now?

[DanaB27]

You will have to request to remove the excess contribution plus earnings to avoid the 6% excess contribution penalty by the due date. You will remove the excess contribution from the Roth since you converted the excess traditional IRA contribution to a Roth IRA which was an invalid conversion and created an excess in the Roth.

You will have to enter the 1099-R for the conversion into the TurboTax:

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis and value

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: 

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
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 J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount under "Another reason" if you are over 59 1/2 (if you under 59 1/2 click "Continue")

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.

[eyeballjames]

Thank you for the reply!

Since I won't have any withhoIdings I decided on creating a new 2022 form1099-R .

What happens if the codes are different later when I receive the actual 2022 1099-R form?

Oh and I assume I'll just enter the same payer information from my 2021 1099-R form.

A question about my 2021 Form 1099-R:

My current 2021 Form 1099-R is showing box 1 and 2 both with $6k and 2b (taxable amount not determined), and box 7 code#2.  I understand that I have taxes due from this conversion.  However, shouldn't the new 2022 from 1099-R cancel out the taxes due?  Seems that the 2022 1099-R would only prevent future tax penalties and not reverse the taxes assessed on the excess contribution?  Please explain. 

Thank you in advance!

James

[DanaB27 · Accepted solution]

Your situation is tricky to enter. Please also see this discussion

If all your value of all your traditional IRA is $0 on December 31, 2021, since you converted the amount then you might be able to try the following.

You will have to enter the nondeductible contribution to the traditional IRA but do not enter that you withdrew the contribution on the penalty screen so TurboTax will create Form 8606. Please make sure that you enter $0 as the value of all your traditional IRAs. Then TurboTax will not calculate a 6% excess contribution since the penalty is calculated by the smaller of the excess traditional IRA contribution or the value of your traditional IRAs on December 31, 2021. Therefore, the penalty will show $0 (please check line 17 f Form 5329)

The Form 1099-R with code P and J that you create for the withdrawal of the excess contribution plus earnings will show that you withdrew the excess contribution.

If this does not work then you might have to find a tax professional locally to help you with the situation.

To enter nondeductible contributions:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Continue through the questions and TurboTax will make the contribution nondeductible.

[eyeballjames]

Thank you!

I made the changes you suggested, and the numbers are matching up.  A question about the self-generated 1099-R showing excess removal:  Do I have to enter anywhere in Turbo tax that I'm removing the excess contribution from Roth IRA?

[eyeballjames]

Hi, one added question to my earlier one few minutes ago...

At the end of Personal Income, Turbotax gave a Picture of Your 2021 Income:  IRA distributions-non taxable is $24,000.  My wife and I each made $6000 excess contribution to Trad IRA, so shouldn't the total be $12,000 instead of $24,000?  Please help.  Thank you.

[DanaB27]

Usually, you can enter the withdrawal of the excess contribution on the penalty screen when you enter your IRA contribution but, in your case, you want to avoid that because then TurboTax won’t create Form 8606. The Form 1099-R with code P and J that you create for the withdrawal of the excess contribution plus earnings will show that you withdrew the excess contribution. Also, you should have gotten the “Explain the Return of Contribution” screen where you are able to explain that you made an excess contribution to the traditional IRA, converted it to Roth, and then removed the excess contribution plus earnings from the Roth IRA.

Yes, that it shows $24,000 on line 4a of Form 1040 as distribution is correct because you have $12,000 from the conversion to Roth and another $12,000 for the removal of excess contribution plus earnings. To verify you didn’t have any earnings, since it is exactly $12,000?

[eyeballjames]

No there was no earnings but actually were losses. I submitted the Excess Removal Form just last week and they are in the process of figuring out the losses. Is it correct to enter the original contribution amounts even if there were losses?

[DanaB27]

No, for Form 1099-R for the removal of the excess contribution please make sure you will enter the contribution amount minus the losses for box 1, and box 2a will be $0.

[eyeballjames]

I see. So that mean if there is a total loss then 1099-R box 1 and box 2a will both be $0?

[DanaB27]

Yes, if you have a loss of $6,000 then box 1 will be $0 since the contribution amount of $6,000 minus a $6,000 loss is $0.

Yes, box 2a will be $0.