Roth Excess Contributions

[Gina58]

I used TurboTax for 2019, and am using the 2020 version also.  In 2019 our AGI was $210,897.  For 2020, our AGI was $196,369.  For both 2019 and 2020 we both contributed the $7000 allowed to our Roths because we are both in our 60's.  Last year, TurboTax did not give me a warning about an excess IRA contribution, yet this year when our AGI is lower, TurboTax tells me that we each have an excess of $250 in our Roths for tax year 2020.  I don't understand.  Please help.

[DanaB27]

TurboTax will give the warning when your modified adjusted gross income (MAGI)  is over the limit. Please see the limits below:

• 2019 - Amount of Roth IRA Contributions You Can Make for 2019 page 42
• 2020 - Amount of Roth IRA Contributions You Can Make for 2020

Please see Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes how the MAGI is calculated.

If you contributed to a Roth IRA but your MAGI creates an excess contribution, then you have the following options for your 2020 excess contribution:

Option 1

Request with your Financial Institution a recharacterization of the Roth contribution as a traditional IRA contribution before the due date of the return.

To report this recharacterization you will enter the following steps into TurboTax:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

Tip: Choose to make this contribution nondeductible if it isn’t already nondeductible because of your income limit and a work retirement plan.  Then you can convert the nondeductible part (basis) tax-free to a Roth IRA (backdoor Roth).

Option 2

Request with your Financial Institution the withdrawal of excess contribution plus earnings by the due date of the return. The earnings will be included in the taxable income for the year in which the excess contribution was made. Please keep in mind that this will increase your MAGI again. Therefore, you might have to withdraw some extra excess contribution to not be caught in a loop.

 If you are under 59 ½ then you will have an 10% early withdrawal penalty on the earnings.

If you withdrew a 2020 excess contribution plus earnings in 2021 before the due date, then you will get a 1099-R 2021 in 2022 with codes P and J. 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 2 enter the earnings
8. Box 7 enter P and J 
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[Gina58]

Thanks for your help.  I read the publications you included.

So of the two top options for the excess $250 for each of our Roths, would you recommend recharacterization of the excess or withdrawing?  I am leaning to recharacterization.

I still do not understand why Turbo Tax did not catch this last year when our AGI was higher than this year?  I rechecked my entries for the 2019 tax year, and I had typed in the $7000 we each donated, and our AGI was $210,897.  There was no message saying we had any excess contributions.

[Gina58]

Dana,

Is it possible to take the excess$250 from each of our Roths for 2020 and have Schwab move these contributions to our 2021 Roths?  Would this avoid paying a penalty on the earnings?  This would seem like a good alternative for us.  Your thoughts?

[DanaB27]

Did you by any chance have a conversion on your 2019 return? That will not be included in your MAGI for Roth IRA purposes. In my experience TurboTax gives you always the penalty warning screen if your contribution results in an excess contribution. Therefore, you might not had an excess in 2019.

It is your choice what you do, but if you recharacterize your 2020 contribution then you will not loose your contribution.

If you tell Schwab to move the $250 plus earnings to the next year then it will show as a distribution and a new contribution, but you might have to double check how they can handle it.

If you just leave it in without involving Schwab, then you would pay the 6% penalty for 2020 and could, via your 2020 tax return, apply the excess to your 2021 contribution.

[Gina58]

Dana,

Thanks for your reply.  Yes in fact I did have a conversion of an old 401K which was $39,157 which we were taxed on because it was considered an IRA distribution.  Do you think this is the reason an excess Roth contribution warning was not triggered by TurboTax?  

[Gina58]

Dana,

How do I tell TurboTax that I want to apply the excess $250 to our 2021 total without involving Schwab?

Gina

[DanaB27]

Yes, the income from the conversion was taxable income on your 2019 tax return but it is excluded for the calculation of your MAGI for Roth IRA. Therefore, you did not have an excess contribution in 2019 and TurboTax correctly did not give you a warning.

[Gina58]

Dana, 

How do I tell TurboTax to apply the excess $250 for each of our Roths to our 2021 contributions without involving Schwab, moving the money, or recharacterizing?

[DanaB27]

Next year on your 2021 tax return you will go to the IRA contribution section and TurboTax will ask if you had any prior excess contribution and then give you the option to apply it as a 2021 contribution. Please keep in mind this will only work if you can contribute to a Roth IRA in 2021. 

Next year on your 2021 tax return:

1. Open your 2021 tax return 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer "Yes" that you made a contribution (even if you did not)
6. Continue until the "Do you have excess contributions" screen and answer "yes"
7. Enter the excess contribution amount
8. O the next screen enter the amount you want apply as a 2021 contribution. 

If you choose this option, then on your 2020 tax return you will still have to pay the 6% penalty for the excess contribution. TurboTax will calculate the the penalty on Form 5329 when you enter your contribution and trigger the waring that you have an excess.

[jhattx]

Hi, thanks for the explanation.  I am in the same excess ROTH contribution boat.

* I did undo my 2020 ROTH excess contribution via ETrade in 2021, before 5/17/2021

* I followed option 2 instruction to create a 1099-R in 2020 Tax Return. 

* TurboTax did tell me that the gain associated with the excess contribution is 10%, $99 in my case (my associated gain withdrawn is $990). 

All is well except I don't understand why my total tax due went up $343 instead of $99 (from owning $2088 to owning $2431)?   The excess contribution should not be taxed as I understand, but it seems to be taxed?

[I am not 59 1/2 yet; withdrew $3200 as excess ROTH contribution and ETrade calculated the associate earning.  So my box1 = $4190.73 and box2 = $990.73]

Thanks in advance.

[DanaB27]

The earnings will be taxed at your regular income tax bracket and you will have to pay the 10% early withdrawal penalty on the earnings. Your total tax on the earnings will be 10% plus your tax bracket rate. Therefore, your tax increased by $343.

@jhattx

[jhattx]

Thank you very much for the speedy reply!