Withdrawn Excess Roth IRA Contributions

[Wolf Larson]

I made $7k excess Roth IRA contributions in 2021.  I just contacted my broker and this contribution has been withdrawn and moved to a non-retirement account in kind.  I did not elect to withhold any earnings because the exact amount could not be determined.  Rather I was advised to wait for the 1099-R to come next year and file an amended return to account for the earnings.  My questions are these:  1. Under "Enter your Roth IRA Contributions" do I enter the $7k?  2. Under "Enter Excess Contributions" do I enter the $7k? Thanks!

[DanaB27]

Yes, you will enter the $7,000 contribution to Roth.

No, you will not enter $7,000 under "Enter your Roth IRA Contributions" this is about prior year excess that wasn't removed.

Please make sure that you enter the $7,000 as withdrawn on the penalty screen during the IRA contribution interview.

To avoid the 6% tax on excess contributions, you must withdraw:

• the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• any income earned on the excess contribution.

You will get a 2022 Form 1099-R  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 2022 Form 1099-R 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 Form 1099-R into the 2022 tax return since the withholdings are reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 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 Form 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 of earnings under "Another reason" if you are over 59 1/2 (if you are 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.

[Wolf Larson]

Thanks, so if I don't withdraw the earnings portion, I will get taxed 6% on just the earnings, not the entire $7k, correct?

[MinhT1]

Yes, you are correct.

But you need to withdraw the earnings in 2022 (or recharacterized them as new contributions),  otherwise they will incur the excise tax each year that they remain in your account.

[Wolf Larson]

Thank you very much.  Yes, my broker said they will provide me a 1099-R which would show the $7k withdraw and the exact earnings amount . Would I then need to file an amended return, or is there an easier path ahead to complete this process?

[DanaB27]

To verify, you requested to have the earnings withdrawn as well but just don't know the amount? Because you stated that the Form 1099-R will show the "$7k withdraw and the exact earnings amount".

If you withdrew the earnings and excess contribution amount and both will be shown on the 2022 Form 1099-R then you do not need to pay the 6% penalty on your 2021 tax return.

Yes, you will have to amend your 2021 return to include the 2022 Form 1099-R with code P and J.

[Wolf Larson]

Thanks for your reply.  So to clarify, I spoke with Vanguard about my excess contribution.  We moved the 7K contribution elsewhere. That leaves the earnings, about $530. Vanguard asked what percentage ("up to 99%) of the estimated amount to withdraw, stating that it would not exact; that the exact amount would come via the 1099-R.  I was told it was just as easy to wait for the 1099-R.  I'm not clear, though, if the 1099-R will already show the correct earnings amount as being withdrawn. It that the typical process - that the 1099-R will account for both the contribution and earnings?

[DanaB27]

Yes, typical people can withdraw the excess contribution plus earnings without issues and then have it reported on Form 1099-R with box 1 the distribution (contribution plus earnings) and box 2a the earnings.

It seems strange that they suggest not withdrawing the earnings since now you will have to pay the 6% penalty on the earnings left in the account.

@Wolf Larson

[Wolf Larson]

OK, so now I am completing the process of filing an amended 2021 return.  Recap: in 2021 I contributed 7k to my Roth IRA not realizing I was not eligible to do so.  In 2022 I had the 7k moved to a non-retirement account along with about $500 in earnings.  My broker issued a 1099-R showing the $7500 distribution, with the $500 being shown as the taxable amount.  For some reason, Turbotax will not correctly load my 2021 tax file but I did see that it used Form 5329 to calculate the tax owed, which was 10% or $50.  So... I went on the IRS website and manually created a 1040-X, including form 5329, and Schedule 2 - Additional Taxes.  I think all that is right.

My question is, how do I now handle the state portion?  I have nothing to transfer over from federal because I did it manually.  I don't mind having to do the state manually too, but how do I calculate the amount I owe due to the $500 taxable distribution??

Thanks!

[fanfare]

"That leaves the earnings, about $530. "

Vanguard is required to calculate the earnings exactly.

and return that to you.

whether they send you a check or move the money to a different account should make no difference.

you have to file the request using form marked "return of excess".

Contact Vanguard and ask for a manager to straighten this out.

@Wolf Larson 

[fanfare]

 " My broker issued a 1099-R showing the $7500 distribution, with the $500 being shown as the taxable amount. "

this contradicts what you said before.

In which case, ignore my post above.

@Wolf Larson