Withdrawal of excess Roth IRA contribution before filing, value less than contrib

[rcamner]

In 2021 I contributed $1500 to my Roth IRA. Unfortunately, due to a taxable distribution I didn't know about at the time, it turned out I was not eligible to make a Roth contribution in 2021.

While preparing my 2021 taxes using TurboTax, I realized my error, contacted my financial institution (Vanguard), and asked for the excess contribution to be withdrawn.

The Vanguard rep explained to me that I would also have to withdraw any earnings on the $1500 excess contribution. But, due to the market downturn in 2022, the value of the $1500 original contribution was now $1091, and this is the amount that Vanguard withdrew from the Roth account.

How do I report this on my 2021 tax return using TurboTax? 

[rcamner]

More info...

In TurboTax, I found a box where I can report how much excess contribution was withdrawn.  But, if I don't report the full $1500 as withdrawn, I will owe the penalty and going forward I will continue to owe a penalty.

Yet, the actual amount withdrawn was less than $1500, due to the change in value of the investment.

So, how do I handle this?

[fanfare]

You enter $1,500.

If the associated earnings are negative you enter zero for that.

[DanaB27 · Accepted solution]

As fanfare mentioned you will enter the full contribution of $1,500 as withdrawn on the penalty screen during the IRA contribution interview.

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. 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 of $1,091 (contribution minus loss)
7. Box 2a enter $0
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.

[rcamner]

Thanks.  I found the spot in TT where one enters the amount of the withdrawal, and you said to put the entire $1500 there.

But, as I continued to click through the EasyStep, I was never prompted to enter the earnings amount (which would be negative).

Also, I know I will receive a 1099-R in 2022 for the excess contribution withdrawal transaction.  What will I do with that in TT when I fill out my 2022 tax return a year from now?  The amount will have already been reported as withdrawn on my 2021 return.  Will I enter the 2022 1099-R received in early 2023? If so, won't that end up being a double reporting of the withdrawal?

[rcamner]

Sorry, @DanaB27... I was typing my last response when your reply arrived.

Thanks for your instructions.

If I enter the 1091 in Box 1, won't TurboTax (and the IRA) think I only withdrew PART of the $1500 excess contribution?  How does TT (and the IRS) know that the difference was "withdrawn" (but was due to the investment loss)?

[DanaB27]

You enter the full amount of contribution as withdrawn on the penalty screen during the IRA contribution interview. 

Plus your 1099-R will have the codes J and P in box 7 showing it was a return of excess contribution plus earnings but since no earnings are reported in box 2a the IRS will know there was a loss.

[Edited 3/8/2022 | 6:37am PST]

@rcamner

[rcamner]

In your first reply you said to report in TT the $1500 contribution as withdrawn (on my 2021 return)

Then in your most recent post you said to report the "full amount withdrawn," which is $1091.

So, I'm confused.  Sorry if I'm missing something obvious.

[DanaB27]

I apologize I meant "enter the full contribution amount as withdrawn" (the $1,500). I edited my answer above.

@rcamner

[rcamner]

Thanks much!