Roth IRA Issue with Form 8606 & 5329

Forum|Forum|3 years ago
March 23, 2023
1 reply
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I just realized that I made too much to invest in Roth IRA for both 2021 and 2022 (6,000 each year). Also I failed to report my contribution on my 2021 tax return.

I have already instructed Vanguard to recharacterize my 2022 contribution to traditional IRA so that I could avoid the 6% penalty. For 2021 contribution, Vanguard did Excess Contribution Removal for me. No 1099R received yet. Did both in March 2023.

Questions:

1) I understand that I should report the recharacterization with Form 8606 on my 2022 tax return. But how do I report my withdrawal/removal with Form 5329 on my 2022 tax return since it happened in 2023? Or should I amend my return with 2021 TurboTax?

2) My excess contribution subject to 6% penalty should be 6,000? Should this be considered early distribution subject to 10% penalty?

3) How do I fill in my 1099R in TurboTax?

Thanks for your help!

Best answer by DanaB27

You will report the recharacterization of the contribution for 2022 on your 2022 tax return with these steps:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
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.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will get a 2023 Form 1099-R for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore 2023 Form 1099-R with code R when you get it in 2024.

You should have removed the 2021 excess contribution as a regular distribution (without earnings or losses) since it was after the extended due date of the 2021 tax return. Therefore, you should get a 2023 Form 1099-R with code J and you will enter this next year on your 2023 tax return. Please make sure that you include the 2021 excess contribution in the net contributions prior to 2023 when TurboTax asks.

Login to your TurboTax Account
Click on "Search" on the top and type “1099-R”
Click on “Jump to 1099-R” and enter all your 1099-Rs
Click "Continue" on the "Review your 1099-R info" screen
Answer all the questions and make sure you enter the net contributions prior to 2023 on the "Enter Prior Year Roth IRA Contributions" screen
Answer the remaining question.

Yes, you will need to amend your 2021 tax return to pay the 6% penalty. All you need to do is enter your Roth IRA contribution in the IRA contribution and TurboTax will automatically calculate the 6% penalty on Form 5329.

You will also have to pay the 6% penalty on your 2022 tax return (since the excess wasn’t removed until 2023):

Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
On the "Do you have any Excess Roth Contributions" answer "Yes"
On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).

D

DanaB27Answer

Level 15

You will report the recharacterization of the contribution for 2022 on your 2022 tax return with these steps:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
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.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will get a 2023 Form 1099-R for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore 2023 Form 1099-R with code R when you get it in 2024.

You should have removed the 2021 excess contribution as a regular distribution (without earnings or losses) since it was after the extended due date of the 2021 tax return. Therefore, you should get a 2023 Form 1099-R with code J and you will enter this next year on your 2023 tax return. Please make sure that you include the 2021 excess contribution in the net contributions prior to 2023 when TurboTax asks.

Login to your TurboTax Account
Click on "Search" on the top and type “1099-R”
Click on “Jump to 1099-R” and enter all your 1099-Rs
Click "Continue" on the "Review your 1099-R info" screen
Answer all the questions and make sure you enter the net contributions prior to 2023 on the "Enter Prior Year Roth IRA Contributions" screen
Answer the remaining question.

Yes, you will need to amend your 2021 tax return to pay the 6% penalty. All you need to do is enter your Roth IRA contribution in the IRA contribution and TurboTax will automatically calculate the 6% penalty on Form 5329.

You will also have to pay the 6% penalty on your 2022 tax return (since the excess wasn’t removed until 2023):

Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
On the "Do you have any Excess Roth Contributions" answer "Yes"
On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).

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J

jinhuang262Author

Level 2

Thank you for your detailed information!

Please see if my understanding regarding the excess contribution in 2021 is correct:

What I need to do on TurboTax:

1) On my 2022 tax return, I will include 2021 excess in prior years and this will result a penalty. No 1099R included.

2) On my 2023 tax return, I will only include 1099R with code J on my 2023 tax return. And also include excess contribution in 2021, but this will not result a penalty.

3) Amend my 2021 tax return using 2021 version TurboTax instead of 2022 version, and pay a penalty.

4) Only Form 5329 Part IV is required. Does this trigger Part I as an early distribution?

fanfare

Level 15

recharacterization: you report the original amount as contribution to the second IRA, earnings are ignored.

return of excess contribution:

before tax due date including extensions: positive earnings are taxable on the Line 4b for the year of the contribution. negative earnings are ignored.

positive earnings removed are penalized 10% if you are under age 59 1/2.

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,

(or offset it with currently allowed contribution) .

earnings stay in the Roth account.

@jinhuang262