Traditional IRA Excess Contribution

[moose007]

I’ve made an IRA excess contribution in 2020 and I asked for the removal of that along with the earnings and my IRA Administrator (Fidelity) reversed them in January 2021. Form 1099-R will be available in January 2022 but I know all the calculation. As far as I understand:

1) I don’t need to pay 6% penalty fee because I did the reverse along with the earnings before the 2020 tax due date

2) I need to report the *interest* as gross income in 2020 tax year

3) I need to pay 10% early withdrawal penalty only on the interest because I am younger than 59.5

A couple of questions:

a) Can someone please help if I need to report #3 in 2020 tax year or not? 

b) Is form 5329 required?

c) I understand I don’t have to wait for 1099-R then amend 2020 tax year return and that I can do it now. Can someone tell me how to use Turbo Tax for that? I found out a way that I can indicate reversing the excess contribution here* but not clear if this is all what I need to do for #2 and #3 above or I need to do extra steps.

* https://ttlc.intuit.com/community/retirement/discussion/help-with-ira-return-of-excess-contribution-...

[DanaB27 · Accepted solution]

a)Yes, you will report the withdrawn contributions and earnings on your 2020 tax return (see letter c answer).

b) Yes, Form 5329 is required and will be created by TurboTax.

c)Yes, you will need to indicate in the contributions section that you withdrew the excess contribution otherwise TurboTax will still calculate the 6% excess contribution tax.

You will get a 1099-R  in 2021 with codes P and 1. 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 in 2021 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. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2 enter the earnings
7. Box 7 enter P and 1
8. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[moose007]

Thanks @DanaB27. That's helpful.

Should I also check the “IRA/SIMPLE/SEP” box in the 1099-R?

Also, to confirm, when I file my 2021 taxes, I should ignore 1099-R unless there’s withholding. By ignoring 1099-R, you mean I should also answer “no” to the question in the image below next year? (It should say 2021 and 2020 respectively)

[DanaB27 · Accepted solution]

Yes, please check the “IRA/SIMPLE/SEP” box in the 1099-R.

Yes, you will answer “no” to the question “any excess IRA contribution before 2021”.

But also you don’t have to enter the 1099-R 2021 in the 1099-R entry section in TurboTax when you file the 2021 taxes unless there are withholdings.

[hullian]

I really love this answer - I've been tearing my hair out about how to report in Turbotax earnings from return of an excess contribution. The ideal, and seemingly the cleanest way for me to do this would be, as you say, to create a 1099-R and report the earnings that way. I've got to ask, are you absolutely certain that this is legal, since I won't be receiving the "real"  1099-R until January 2022? You say in your response that I can simply "ignore the 1099-R when it comes" (there are no withholding issues with my situation). What does the IRS do when I "report" a 1099-R and they don't have a matching one? If they really don't care, and if that's the only way I can report these earnings, then thank you! But I'm just a little nervous. Can you please help to assuage my concerns? Thank you!

[DanaB27]

Yes, this is legal because the code on the 1099-R 2021 that you get in 2022 tells you and the IRS that you have to put it on your 2020 return. The 2021 code P will not do anything on your 2021 return. The only information that gets on your 2021 tax return from the Form 1099-R 2021 with code P are taxes withheld.

Also the IRS states:

How to treat withdrawn interest or other income from withdrawal of excess contribution.

You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. 

@hullian

[hullian]

Thanks again! You would think that if the IRS is going to tell you to “Report it on your return for the year in which the excess contribution was made.”, they would also tell you exactly HOW to do that! But of course, that’s too much to expect from them...so thank you, I will do as you suggest, and hopefully you won’t be visiting me in tax prison! 🤞

[rs535353]

There seems to be a bug in TurboTax. I am using TurboTax Premier and in the search box when I type in 1099-R i don't see “Jump to 1099-R” option.

If I try to create new 1099-R, there is no option to say which year - in my case 2021, anywhere.

I tried different ways to get to 1099-R but there simply is no option to select the year 2021.

Either the tips are written without verifying or certain versions of TurboTax has bugs.

I made a excess contribution on 12/2/2020 and removed it on 2/16/2021 with $960 in earnings.

I am unable to report this using TurboTax with the suggested instructions as I can't select year 2021 for form 1099-R. Also search has no option for 1099-R.

[rs535353]

Additionally, when I try to create a new 1099-R, line 7 option P states 'remove excess for year 2019'.

And I want to remove excess for year 2020.

At this time, it looks like I wasted money on TurboTax Premier

[hullian]

Try code 8 instead of code P.

[bkg1]

A few follow up questions as I have the same situation - did return of excess 2020 contribution and 1099R will only be available Jan 2021. Per this thread it looks like I must submit a 1099-R myself.

1. Turbotax Premier Desktop is suggesting Form 4852, is that really needed?

2. Do I need to fill 5329 myself and where is that option?

[macuser_22]

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@bkg1 wrote:

A few follow up questions as I have the same situation - did return of excess 2020 contribution and 1099R will only be available Jan 2021. Per this thread it looks like I must submit a 1099-R myself.

1. Turbotax Premier Desktop is suggesting Form 4852, is that really needed?

2. Do I need to fill 5329 myself and where is that option?

---

No.  A substitute 1099-R (4852) is ONLY to correct in improper 1099-R that you have received and the insurer refused to correct.

You have not received the 2021 1099- R yet.

This is a year old post about a 2019 tax return.

You should post a NEW question explaining your situation and details.

[bkg1]

will post now. thank you anyways. 

[ash49]

@ DanaB27, your responses were very helpful.  However, I have a couple follow-up questions:

My situation is related but not same.  AFTER filing my 2020 tax return, I contributed $7000 to 2020 Traditional IRA in April 2021 by mistake. Since it was not beneficial for me to leave it in the IRA (was not tax deductible for me), I had my custodian brokerage firm return the full 2020 contribution out of my IRA later in April. I got a return of $7,161.47 that included earnings of $161.47 while it was in the IRA.

Note, I am over 60 years (and so no 10% early withdrawal penalty), and my withdrawal is NOT a return of EXCESS contribution (mine was within limits). But I am entitled to get the return of my contributions anyway since I did a timely return of monies.

Questions:

• Per DanaB27’s posting, I assume I should account for BOTH the contribution of $7,000 and the return of $7,161.47 in the 2020 tax return?
• Will both parts be accounted for in 2021 forms 5498 and 1099-R respectively from the brokerage firm?
• Can I address in 2022, after I get 2021 forms 5498 and 1099-R, both the contribution and the return parts by amending the 2020 return, or would I need to address my original contribution (or both) before 17 May 2021?

Appreciate a response.

[DanaB27]

Yes, you will get Form 5498 for the contribution and Form 1099-R for the distribution.

Yes, you will report the contribution and return of contribution on your 2020 return. Since you have already filed your 2020 return you can wait until you get Form 2021 1099-R in 2022 and address it then.