Roth IRA Mess - Multi-year over contributions, improper withdrawal

[mgd1770]

I contributed to a Roth IRA in 2020 ($200), 2021 ($1200) and 2022 ($2100). In January 2023 I realized our combined income made me ineligible for these Roth IRA contributions.  (TurboTax never asked us to enter Roth IRA contributions so we were unaware of this problem until I stumbled on external info.)  I panicked and simply withdrew all money from the Roth IRA in January 2023. (I'm under 59 so there are also penalties for early withdrawal.) I called Vanguard to get a 1099-R to prove the withdrawals.  The rep told me I'd have to rollover the exact amount I withdrew back into the Roth IRA, then begin a different process of withdrawing excess contributions to get the correct forms.  Does this sound correct?  I'm afraid the rollover in 2023 would double count as a contribution for 2023, which I cannot make.  How do I fix this? I've really made a mess of it.

[DanaB27]

For the 2020 and 2021 excess contributions, you are only able to request a regular distribution (without any earnings) which will be reported on your 2023 tax return. You will have to pay the 6% penalty for the 2020 excess contributions on your 2020, 2021, and 2022 tax returns. For the 2021 excess contribution, you will have to pay the 6% penalty on the 2021 and 2022 tax returns. It seems you made a regular distribution for 2020 and 2021 and therefore, all you have to do is add the penalties on your 2020, 2021, and 2022 returns in regard to the 2020 and 2021 excess contributions.

Generally, you would have been able to avoid the 6% penalty on your 2022 excess contribution if you had requested the withdrawal of an excess contribution plus earnings before the due date of the 2022 tax return. It seems you requested a regular distribution of the excess contribution without the earnings. Therefore, it seems you will have to pay the 6% penalty for the 2022 excess contribution on your 2022 tax return since you did not withdraw the earnings. When you pay the penalty then you are able to leave the earnings in the account and don't need to take any further steps since you withdrew the excess. You will report the distribution as a regular distribution on your 2023 tax return. For your information, you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. 

Please follow these steps to enter the 2022 excess contribution and the excess contributions from previous years:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter your 2022 contribution
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 and 2020

Please see How to amend a tax return for instructions to amend your 2020 and 2021 returns to include the 6% penalty.

[mgd1770]

Hi DanaB27 - I actually requested withdrawal of everything in the Roth IRA - proper contributions, excess contributions, and earnings.  I zeroed it out.  That's why the Vanguard rep told me I needed to put it all back into the Roth IRA using a rollover and only withdraw the excess.  But I'm afraid if I put the money back in using a Rollover it will count as yet another excess contribution - this time for 2023.  Is that how rollovers work?

[mgd1770]

Also regarding the instructions to use the search bar to find IRA contributions and Jump To, none of that was visible for us.  When we typed it into search we got a list of unrelated questions and no Jump To option.

[DanaB27 · Accepted solution]

Yes, a rollover occurs when you return the withdrawn funds within 60 days into the same or similar retirement account. (IRS)

Therefore, you can return (rollover) the proper contributions, the earnings, and the 2022 excess contribution. It will not count as a 2023 contribution. You do not need to return (rollover) the 2020 and 2021 excess contributions since taking a regular distribution fixes the excess contribution.

You then can request to withdraw the 2022 excess contribution plus earnings to avoid the 2022 penalty for the 2022 excess contribution only (you still have to pay the penalty in 2022 for the 2020 and 2021 excess). It is important to fill out the correct withdrawal form so your institute codes Form 1099-R correctly.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click "Federal Taxes" and select "Wages & Income"
3. Click "I'll choose what to work on"
4. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
5. Answer "Yes" to "Did you get a 1099-R in 2022?"
6. Select "I'll type it in myself"
7. Box 1 enter total distribution (contribution plus earning)
8. Box 2a enter the earnings
9. Box 7 enter J and P
10. Click "Continue"
11. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. 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 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

Please follow these steps to get to the IRA contribution section:

1. Click “Deductions &Credits” on the top
2. Click "I'll choose what to work on"
3. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
4. Select “Roth IRA”
5. Enter your 2022 contribution
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 and 2020

@mgd1770