In December 2021 I moved money from my traditional IRA and opened up a new Roth IRA. I assumed that I qualified to contribute to a Roth IRA. Turbotax is now saying I owe a penalty because I did not qualify. It indicated that if I withdrew the contributed amount from Roth IRA I could avoid the penalty. My challenge is that the value of the Roth IRA is now less than the original contribution due to market downturn.
If I withdraw the entire balance, will that resolve the issue, even though It will be an amount less than original 2021 contribution? Do I need to make any special entries in Turbotax to reflect the delta between contributed amount, withdrawn amount and loss of value in the account?
You can avoid the excise tax (penalty) if you withdraw your excess contribution by April 18, 2022.
In this case, on your 2021 tax return, you do not report the excess contribution as it has been withdrawn.
The loss on your Roth IRA can be deductible subject to conditions.
You must have closed all your Roth IRA accounts (including those with positive earnings, if any) and the net loss is deductible as a miscellaneous itemized deduction subject to the 2% of AGI threshold. So if your total itemized deductions do not exceed your standard deduction, then that net loss would have no effect on your taxes.
If you can use your loss (under the above conditions), you can claim it on your 2022 tax return.
Please read this TurboTax article for more information.
In my advice above, I have assumed that you withdrew money from your IRA then afterwards opened a Roth IRA. However, if you did a conversion from your IRA to a Roth IRA (either trustee-to-trustee or within 60 days of receiving the funds), then this is a rollover which is taxable but there is no penalty. Please see Opus17's answer below.
In this case, please review your 1099-R (from the IRA) to indicate that this is a conversion to a Roth IRA.
@ITExec I have edited my answer.
@Opus 17: Thank you.
[Edited 02/10/2022 | 12:10PM PST]
You can avoid the excise tax (penalty) if you withdraw your excess contribution by April 18, 2022.
In this case, on your 2021 tax return, you do not report the excess contribution as it has been withdrawn.
The loss on your Roth IRA can be deductible subject to conditions.
You must have closed all your Roth IRA accounts (including those with positive earnings, if any) and the net loss is deductible as a miscellaneous itemized deduction subject to the 2% of AGI threshold. So if your total itemized deductions do not exceed your standard deduction, then that net loss would have no effect on your taxes.
If you can use your loss (under the above conditions), you can claim it on your 2022 tax return.
Please read this TurboTax article for more information.
In my advice above, I have assumed that you withdrew money from your IRA then afterwards opened a Roth IRA. However, if you did a conversion from your IRA to a Roth IRA (either trustee-to-trustee or within 60 days of receiving the funds), then this is a rollover which is taxable but there is no penalty. Please see Opus17's answer below.
In this case, please review your 1099-R (from the IRA) to indicate that this is a conversion to a Roth IRA.
@ITExec I have edited my answer.
@Opus 17: Thank you.
[Edited 02/10/2022 | 12:10PM PST]
So there's two things going on here.
1. You did a conversion-rollover. A rollover from an IRA to a Roth IRA is a conversion and you need to pay income tax on the conversion. There is no limit to the amount you convert, but you must report it to Turbotax as a conversion, not just a withdrawal. When you enter the 1099-R from the IRA, you are asked what did you do with the money. Choose that you put it into another retirement account. You will be asked how much (all of it, unless you did not convert it all) and you will be asked what kind of account, make sure you indicate a Roth IRA.
2. Did you actually make contributions to the Roth IRA as well? A conversion is not a contribution, they have different rules. To make new contributions, you must be within certain income lints, and you must have income earned from working a job of some kind (compensation) and the contribution limit is $6000 per year or $7000 if you are over age 50. Conversions do not count against your contribution limit.
My guess is you reported the conversion incorrectly, and that's why it looks like an excess contribution.
Further information: If you wanted to do an IRA to Roth conversion, the best way is to open the Roth IRA and then have the money electronically transferred from plan A to plan B, so you never touch it and it gets handled as a proper conversion.
If you got a check from plan A, this would be an indirect rollover, and you had 60 days to deposit it in plan B, and you should have told plan B in advance this was a rollover and not a regular contribution. If you completed the transaction within 60 days but did not tell plan B it was a rollover, contact them now and see if they can accept your correction.
If this was not a proper rollover, then you have two separate transactions, a withdrawal and a contribution. The Roth IRA contribution has certain rules and if you don't meet those rules you have to withdraw the excess. I'm hoping this was a rollover/conversion and you just entered it wrong in Turbotax.