Roth IRA Excess Contribution

[ImpostoRapido]

Hi @DanaB27 (sorry for directly asking you the question but you seem to have a good handle on this subject per a recent question on a Roth IRA Excess Contribution), and I was hoping you could help with my 2023 401k excess contribution. Thank you.

Situation:

• My wife has two concurrent jobs with two different companies, and each issues a W2 and has a 401K plan
• Turbotax picked up last week (i.e., in 2024) that my wife had inadvertently contributed beyond the $22.5K limit in 2023
• She elected to fix the situation with one of her jobs and filled out the Return of Excess Contributions (ROE) asking for a 35% federal withhold as well as state taxes withhold (i.e. Massachusetts)
• HR has already submitted the ROE to Fidelity
• HR has indicated that if Fidelity process her ROE this week, they will have payroll issue a corrected W2
• It is unclear that Fidelity will have sufficient time before 4/15 (i.e., a week from today) to issue a 1099-R and a refund

Given the above:

1. Does it make sense for her employer to amend the W2? Shouldn't they leave it as is and TurboTax (TT) handles the correction process?
2. Presumably Fidelity will cut her a check for the excess deferral amount, and upon entering that info in TT, TT will make sure that my wife gets taxed for that excess still in 2023's taxes. Correct?
3. Presumably Fidelity will also cut me a check for any earnings accrued on the excess deferred amount, minus the taxes we asked them to withhold. Correct?
4. Fidelity will issue a 1099-R in 2024 and box 4 and box 14 will include the amounts they withheld on the earnings accrued by the excess deferred amount. I will then report these amounts in tax year 2024, and indicate I received a 1099-R. Correct?
5. Insofar as (2) above and entering info in TT for my 2023 taxes, is the info referenced below correct? Presumably TT will ask me for the excess deferred amount somewhere? (note: I lifted and adapted it from a 2022 answer)
6. Preparing for the worst case scenario. What happens if Fidelity is unable to complete the ROE request before 4/15? Should I ask for a filing extension? Other?

Thank you again. Trying to get ahead of the curve here (albeit clearly already late in the game!)

Ref: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/401-k-excess-deferral-treatment/... 

1. Click on Federal in the left-hand column, then on Wages & Income
2. Continue and locate the section Less Common Income
3. Select Miscellaneous Income and click Start
4. Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
5. Answer the question "Did you receive any other wages?  Yes
6. Click through the questions till you get to Any Other Earned Income
7. Answer Yes to Did you earn any other wages?
8. Indicate Other as Source of Other Earned Income and click Continue
9. For the description enter "2023 Excess 401K Deferrals" and click on Done

[DanaB27]

You don't edit the W-2, enter it as shown. You can ignore the excess deferral message since you took the steps to fix it.

Yes, you must include the excess deferral in your wages in the year the excess deferral happened and you can use the steps you mentioned.

If you receive the distribution in time (by April 15th) then you will receive a 2024 Form 1099-R with code P for the excess deferral and you can ignore it since you used the steps above to include it on our 2023 return. You will also receive a 2024 Form 1099-R with code 8 for the earnings and withheld taxes, this will be entered on your 2024 return.

If you do not get the distribution in time then you will get a 2024 Form 1099-R for a regular distribution and this has to be entered on your 2024 tax return.

Please be aware, if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

@ImpostoRapido 

@jannethu No, you don't need enter your Roth IRA contribution in the IRA contribution section since you withdrew the excess plus earnings by the due date. If you entered it already, then you can enter that you withdrew the excess contribution amount on the penalty screen at the end of the IRA contribution interview. 

If you don't report it now on your 2023 return then you will have to amend your 2023 return to report the 2024 Form 1099-R with codes P and J. 

[BCAR]

My wife and I both had excess Roth contributions for 2023.  We have already removed the contributions and the gains from both Roth's this week (prior to the tax deadline).  Using the previous guidance and substitute 1099-R's coded with P and J,  the federal TT return seems correct (proper taxation of only the gains), but my TT state (NJ) return does not tax the gains, ($1782 for me and $652 for my wife).  Any suggestions?   

[nyoha]

This thread and reply was a life saver. Hopefully Turbo Tax improves the documentation and guidance to make this more clear.

[dmacjr15]

BCAR

not a TurboTax expert by any means, but when I followed the guidance in this thread all my Federal and State forms were updated correctly and seemed to account for the excess contribution I had. I double checked my states and they pull in the correct numbers from the Fed filing. I would not really be able to give you sound advice on why NJ state is not taking this into consideration. Maybe somewhere along the line you have to drop this gain on excess as income to be taxed for the NJ state to account for it. Sorry can't be of much more help.

[DanaB27]

You will need to report the earnings on line 20a of Form NJ-1040. This is a little bit tricky, to do this you will need to enter the excess contribution amount in the contribution amount previously taxed during the NJ state return:

1. On the “You've Finished Your New Jersey Return” click “Update” next to “Adjustments”
2. Continue until you get “IRA Information” screen.
3. Select “Yes, this was the first year of withdrawal from this IRA” enter the excess contribution for 2023 next to “Total of IRA contribution previously taxed”

"Use the New Jersey IRA Worksheet to calculate the taxable and excludable portions of a withdrawal from a traditional IRA or nonqualified withdrawal from a Roth IRA. If you make withdrawals from several IRAs in the same year, you can use a separate worksheet for each IRA, or you can combine all IRAs on one worksheet. Report the total taxable amount, and the excludable amount if you are a resident, on your tax return. You can use the IRA Worksheets that appear in the New Jersey Income Tax return resident or nonresident instruction booklets. Do not file the IRA Worksheet with your New Jersey Income Tax return. Keep it for your Records." (NJ Retirement Income Understanding Income Tax page 12)

@BCAR 

[BCAR]

Thank you for your help DanaB27,

All information is entered for both Roth distributions, gross and taxable amounts for each, but there was no change on retirement income, line 20a Form NJ-1040.

In addition to the two excess Roth contributions requiring removals, I also had a Roth conversion from a traditional IRA that could be a factor here, although the federal return came out fine.  Here are the details:

For me:  Roth conversion from traditional IRA:   $120,000 of which $119,996 is taxable

                Roth distribution (because of excess contribution):  $9282 of which $1782 is taxable

For wife:  Roth distribution (because of excess contribution):  $2152 of which $652 is taxable

TT is showing $120,228 on line 20a and $4 on line 20b of Form NJ-1040.  

Seems from the sum of the numbers above that line 20a should be $122,430, which would also be in accordance with line 4b on Federal Form 1040

More thanks in advance

[BCAR]

Successful with a little more effort.  Thank you.

I was able to work with the numbers on both of the NJ IRA Worksheets and produce the correct taxable amount for line 20a of Form NJ-1040.

Thanks