ROTH IRA exceed contribution question

[soniawu]

I contributed the allowed amount to ROTH IRA. My MAGI is more than my contribution. But all my MAGI is from my retirement account withdraw. Is it an exceed contribution?

[DanaB27]

Yes, it seems as if you have an excess contribution.

Please be aware, that you need taxable compensation (wages, self-employment) to make IRA contributions. Retirement income doesn't count as taxable compensation.

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.

Please request the withdrawals of excess contribution plus earnings with your financial institute by the due date. The earnings will be taxable in 2021 and are also subject to the 10% early withdrawal penalty if you are under 59 1/2.

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 (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 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.

[soniawu]

Thank you for your quick and detailed response.

One thing I am confused. If I would go for the second option, report it now in my 2021 return....., I know only my contribution but not the earning now, how can I enter the box 2a for the 1099-R? Assuming I withdraw only my contribution, $7000.

[DianeW777]

You can find out the earnings amount from the financial institution so that you can report that now. It is required to be reported on the 2021 tax return as indicated by our awesome Tax Expert @DanaB27.

Once you have the amount, you can continue to complete the 2021 return and will not need to be concerned about amending it next year.

[soniawu]

Clear now. I will work with my financial agent.  Thanks.