Roth IRA Excess Contribution for Tax Year 2021

[BodieBoy1208]

I am using Turbo Tax Premium 2022 online version. I had made a mistake last year and contributed $5,000 to my Roth IRA when I was not eligible to since over the income limit. I then had the excess contribution(s) for 2021 tax year removed by TD Ameritrade on 6/1/2022.

For tax Year 2021 I made two separate contributions for $5k total. Because of this I received two 1099-R's in 2022. I am now struggling in Turbo Tax to properly document these and also am confused regarding if an amended 2021 return needs to be filed. 

Contribution on 10/21/2021 of $1,000 (for tax year 2021)

-$861.29 gross distribution; $0 taxable amount; Distribution codes of J & P

Contribution on 1/24/2022 of $4,000 (for tax year 2021)

-$3,662.81 gross distribution; $0 taxable amount; Distribution codes of 8 & J

When I enter the two 1099-R forms in Turbo Tax it mentions that I may need to file an amended return for 2021. However there is no further direction. Do I need to file an amended return for last year if I am now documenting that I removed the excess funds within my 2022 return?

Next item, my Turbo Tax is still showing "Additional tax on IRAs and similar accounts" of $300 as an owed tax despite the $5k excess contribution being removed by TD Ameritrade. I was also charged this on my 2021 return which I understand, but for 2022 I should no longer be charged this 6% penalty tax since I had removed the excess funds. How do I reconcile this in Turbo Tax to show that I have withdrawn the $5k excess contribution and am no longer subject to 6% fee for 2022 tax year?

[dmertz]

TurboTax is reminding you that the returns of contribution needed to be reflected on your 2021 tax return.  Since your 2021 tax return included Form 5329 to report an excess Roth IRA contribution, you must amend your 2021 to remove that and your Roth IRA contribution.  Your amendment should include an explanation statement regarding these returns of contribution.

Because your account had losses rather than gains, there is no net income attributable to these returns of contribution.  Other than amending your 2021 tax return as I described, you can ignore these Forms 1099-R.  In 2022 TurboTax you'll have to correct to $0 the amount that TurboTax shows as your excess contribution carried in from 2021.

[DanaB27]

You shouldn't have to pay the 6% penalty on your 2021 and 2022 tax returns since you removed the excess by the extended due date. 

On your 2021 return, you should have entered on the penalty screen during the IRA contribution interview that you removed the $1,000 by the extended due date. Then TurboTax won't calculate the 6% penalty. The 2022 Form 1099-R with codes J and P will be entered on your 2021 tax return. But since you didn't have any earnings this won't be taxable. Please see How do I amend my federal tax return for a prior year?

On your 2022 tax return, you will enter on the penalty screen during the IRA contribution interview that you removed the $4,000 by the extended due date. You will also need to delete the excess amount that got carried over from 2021. Then TurboTax won't calculate the 6% penalty. 

1. Click "Deductions & Credits" (under Federal) on the left
2. Scroll down and click "Show more" next to "Retirement and Investments"
3. Scroll down and click "Start" next to "Traditional and Roth IRA Contributions"
4. Select “Roth IRA”
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen delete the total excess contribution from 2021 that was carried over.
7. Continue until the penalty screen and enter the excess contribution amount withdrawn ($4,000).

 The 2022 Form 1099-R with codes 8 and J will be entered on your 2022 tax return. But since you didn't have any earnings this won't be taxable.

1. Click "Wages & Income" (under Federal) on the left
2. Scroll down and click "Show more" next to "Retirement Plans and Social Security"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)"

[BodieBoy1208]

Okay thanks, I guess I am still somewhat confused. Both the $1k and $4k contributions were made for tax year 2021. 

The $1k 1099-R form has J & P, so I should attach this to an amended 2021 tax return and not submit to my 2022 return?

As for the $4k 1099-R form, this was supposed to be for tax year 2021 but looks like TD Ameritrade characterized it as a removal for 2022 since they use 8 & J. Could this be a mistake? I would think this would be issued along with the 2021 amended return as well but let me know if otherwise.

The long and short of it is which 1099-R gets issued with the amended 2021 and which goes with 2022?

[dmertz]

The code indicates that year in which any gains in box 2a are taxable, not necessarily the year for which the contribution being returned was made.  With no taxable gains in box 2a, it really doesn't matter which of these codes the Form 1099-R has.  What matters is that the IRA custodian coded the original contribution as being for 2021 and you provide a proper explanation statement with the amendment of your 2021 tax return to remove the contribution and penalty.

Note that when you removed the contribution from TurboTax (or indicate that you made the contribution and had the entire amount returned), TurboTax will simply delete Part IV of Form 5329.  You should actually file Form 5329 Part IV showing zeros on lines 23, 24 and 25 where there were previously nonzero amounts to explicitly indicate the change.

[BodieBoy1208]

Okay I think I understand now, thanks for your explanation.

Just to confirm, I should file an amended 2021 return for 2021 and attach the 1099-R for the $1k contribution removal to that return.

For my tax year 2022 return, I should then attach the 1099-R for the $4k contribution removal only. Or should I also attach the 1099-R for the $1k contribution removal here as well?

[dmertz]

You do not attach the 2022 Forms 1099-R to your 2021 amendment or to your 2022 tax return.  In each case you provide an explanation of the return of contribution.

[BodieBoy1208]

Okay thanks, I went ahead and e-filed the amended 2021 return in Turbo Tax. Once the e-file was complete I was then prompted to print off the tax return and mail it in, both the federal to the IRS and the state to Illinois. I didn't make any changes to my state return, do I need to file anything here? And do I really need to mail in a copy of the amended federal as well to the IRS?

[DanaB27]

If you were able to e-file the 2021 amended federal return then you do not need to mail in the return.

You do not need to amend your state return if nothing changed.