ROTH IRA Excess Contribution: Carry Forward

[IRStress]

PART 1 ( 2020 Excess )

• I contributed 6,000 to my 2020 Roth IRA.
• My Earned Income for 2020 was 3,000.
• This created an excess contribution of $3,000.
• I didn't remove the excess before filing 2020 taxes so I paid the required 6% Fee for 2020.
• I forgot to remove the excess before DEC 31, 2021, so I must now pay 6% fee for 2021.
• I understand that I can credit my 2021 Roth IRA with the 3,000 excess, instead of removing it.

PART2 ( 2021 Excess )

• I contributed 6,000 to my 2021 Roth IRA. 
• My Earned Income for 2021 was again 3,000. 
• This created another excess contribution of $3,000.
• This time I want to remove the entire 6,000 contribution plus earnings before filing my 2021 taxes. 
• Then I want to credit my 2021 Roth IRA with the 2020 Roth IRA Excess Contribution of 3,000.

QUESTION

• Can I credit my 2021 Roth IRA with the 2020 Roth IRA Excess, even if I contributed the maximum 6,000 for 2021 BUT THEN I remove it all before filing my 2021 taxes ?
• Any guidance on how to do this properly in Turbotax would be greatly appreciated! 🙂

THANK YOU !!

[MaryK4]

Yes, you can use the excess $3000 in 2021 (called an absorption), which makes your 2021 excess contribution $6,000.  Now you can make the corrective distribution before the dues date of the 2021 tax return and not incur additional penalty.

In TurboTax, you will enter in the Deductions and Credits section.   If you used TurboTax last year, it should have the information and ask you about the excess, if not it will ask you if you had an excess contribution- just indicate No and continue.  After you enter the 2021 contribution, you should see the same screen that warns you of the excess.

[IRStress]

Thank you for your prompt response. Great news, I thought I'd still have to pay the 2021 6% Fee on the old 3,000 excess, but it makes sense that if I'm allowed to do an absorption in 2021 then I'll only have the new 6,000 excess in 2021.

Once I remove the 6K excess for 2021, then when I file my 2021 taxes in Turbotax. Do I still have to say that I made a contribution in 2021? or should I say I didn't do any contribution since I removed it before filing 2021 taxes?

If I say that I contributed 6,000 in 2021 then it will say that I have a 6,000 excess after the absorption. I am guessing it'll ask me after if I already removed it so I won't have to pay the 6% fee?

[DanaB27 · Accepted solution]

Yes, you will enter your contribution and then enter on the penalty screen that you removed the $6,000 excess by the due date during the IRA contribution interview. Then you will not have to pay the 6% penalty for 2021. Please make sure you request the withdrawal of excess contribution plus earnings with your financial institute. 

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"

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.

Please see What happens if I made an excess Roth IRA contribution for additional infornation.

[IRStress]

WOW @DanaB27 . You just went above and beyond to help me! I sincerely appreciate the time it took you to, not just answer my question, but to make it as clear as possible and with the steps all broken down for me to enter it correctly into Turbotax. May the universe return your kindness ten fold.