Roth IRA excess contribution in 2021 with negative return. TurboTax shows I still over contributed

[rcarter99]

I contributed $7000 to a Roth IRA in 2021. 

Today, TurboTax calculated my MAGI and now I find my income in 2021 was too high to contribute anything to a Roth IRA in 2021.

My Roth IRA is currently (February 2022) worth only $6400 due to drops in the stock market in 2022. That is $600 less than what I contributed.

I plan to remove the excess contributions; however, the maximum I can withdraw is the value of the account, which is $6400.  When I enter that into TurboTax, it says I still have an excess $600 contributed in 2021 and TurboTax shows a tax on that excess contribution.

I was also covered by a retirement plan at work in 2021, so I can't move this contribution to a Traditional IRA.

My questions:

(1) What do I need to do for TurboTax to show $0 tax due after I empty out my Roth IRA?

(2) Am I required to "contribute" the lost $600 from some other source, and if so, where do I put it?

[DanaB27]

1. If you decide to withdraw the excess contribution minus loss then you will enter that you withdrew  $6,000 on the penalty screen in the IRA contribution interview.

2. No, you do not need to make up the loss.

Please be aware that you can also recharacterize your Roth contribution as a traditional IRA contribution since your contribution was only limited by your MAGI. Please request the recharacterization with your financial institute by the due date.

If you decide to recharacterize then you will enter the recharacterization when you enter the contribution to the Roth IRA:

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"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a screen saying $0 is deductible)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R when you get it in 2023. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

Please see What happens if I made an excess Roth IRA contribution for additional information.