Roth IRA Early distribution

[dldongyuelei]

Last year I opened a Roth IRA account and contributed 10k (after tax). Several months later I realized my income exceeded the Roth IRA cap, so I withdrew all the 10k and 400 capital gain. When I'm reporting tax this year, TurboTax calculated 3.5k federal tax due for my Roth IRA "early distribution". What can I do to avoid this?

[DanaB27]

Did you request the return of excess contributions plus earnings? If this was an excess contribution for 2021 withdrawn in 2021 then your Form 1099-R should have codes J and 8; box 1 should be the excess contribution plus earnings and box 2a should be only the earnings of $400. Only the earnings will be taxable income and also subject to the 10% early withdrawal penalty.

If your Form 1099-R shows this as regular distribution then might need to contact your financial institute to correct this.

[dldongyuelei]

Thank you!

My bank says they can't fix it since I didn't fill out a form at the time of withdraw. Is there any way I can fix it myself?

[ThomasM125 · Accepted solution]

You would make an entry for a substitute form 1099-R and put the withdrawal amount in box 1 and the earnings in box 2(a). You will see an option to create a substitute form 1099-R on the screen that says Tell Us Which 1099-R You Have when you go to enter the form 1099-R. Code the substitute form 1099-R as "8" in box 7, for excess contributions plus earnings. 

[dldongyuelei]

Follow up question: Do I need to keep the original 1099R after put in a substitution or do I delete it?

[ThomasM125]

You need to delete the original 1099-R, otherwise you will be duplicating your entry. If there was a incorrect 1099-R issued, It is possible the IRS will suggest a correction to your tax return after you file it to adjust it to the figures submitted to them. If so, you can explain what happened and that should resolve the issue.

[Gleam55]

TT Community,

My confusion from TT’s wording in the IRS section has continued for weeks.  Let me explain. 

• I converted some IRA funds to a Roth IRA in 2010.  That’s the only time I did so. 
• TT asked when the conversion took place so I checked the 2016 and prior box.  
• Next TT asked for my Net Conversions 2016 and prior.  I took distributions in 2019, 2020 and 2021.  I understand the IRA and Roth distribution ordering rules.  What confuses me is this question, Net Conversions 2016 and prior…Report Net Conversions to my Roth IRA that were taxable and non-taxable in 2016 and prior years. But the Learn More example covers 2019 and 2020.  Should I  ignore the learn more example and take the question literally…only reporting the distributions from 2016 and prior (there were none)?

Cheers and thanks, Gary

[Gleam55]

Correction to the last line - "...only reporting any conversions minus distributions that took 2016 and prior ?

[DanaB27]

You will enter your conversions from 2016 and prior years minus any distributions that are allocated to this conversion according to the ordering rules.

@Gleam55

[Gleam55]

So the distributions are ones that can go through 2021 but are only subtracted from the Conversions made 2016 and prior?

[DanaB27]

For example, if you had a $20,000 conversion for 2016 and prior years and a $5,000 distribution in 2019, and another $5,000 distribution in 2020 (no direct contributions and no prior distributions to 2017) then you will enter $10,000 as a net conversion for 2016 and prior years. The 2021 distribution will be calculated on your 2021 tax return.

But if you had only $6,000 conversion for 2016 and prior and then another conversion in 2017 you would enter $0 as a net conversion for 2016 and prior years. And the rest of the 2020 distribution would be allocated as withdrawn from the 2017 conversion.

@Gleam55

[Gleam55]

Excellent.  Thank you.