Roth IRA

[dmertz]

Regarding #1, I just want to make sure that this was requested as a return of part of the contribution made for 2021 just like the return of $3,398 was done as I mentioned several times previously, not requested as a regular distribution.  Given your BTW, I'm concerned that this done as an ordinary distribution.  If it was done as an ordinary distribution, the opportunity to avoid the 6% penalty for 2021 has been lost since only one of the ordinary $1,250 distributions can be rolled over.

As far as #2 goes, it has nothing to do with 2021.  It's simply a 60-day rollover of the ordinary Roth IRA distribution that was made on March 4, 2022.  If Vanguard won't accept this as a rollover, yes, your daughter could establish a Roth IRA at Fidelity and roll it over there.  The Roth IRA there can be opened online, but funding it with the $1,250 rollover generally requires mailing a check along with their Deposit Slip form with the "60-day rollover" box marked:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/deposit-slip.pdf

See this IRS webpage regarding rollovers:

https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

[Chris_99]

Wow, thank you so much for being so thorough with us, and we really appreciate it!

1.  I think I followed your suggestion correctly.  I pull out $1250 from her 2021 Roth.  They asked me to choose a box.  First box "the deadline for withdrawing excess contribution from my IRA to avoid the 6% penalty HAS NOT passed", second box "The deadline has passed".  I chose the first box.  I think box 1 means "a return of part of the contribution made for 2021", box 2 means "a regular distribution".  I really hope I did it right this time.

2.  I totally trust your saying!  I think the rep was confused, but he did say that I need to mail in the check, and give instructions for how to deposit the check.  I will look for the similar form from Vanguard, if I can't find it, I will open a fidelity account for her.

3.  I was re-reading all your posts, and finally finished her 2020 tax return.  I want to quickly go through some numbers with you.  She has no income, no 1099-R, nothing but $75 due on Form 1040.  Schedule 2, Line 10 is $75.  Form $8539 line 23 and 24, $1250, Line 25 $75.  Are those numbers sound right?

Thanks!!!!!

[Chris_99]

Re-read all your posts again, and have the courage to file her 2021 return now.  She only has one 1099-NEC, with $2800 in box 1.  No other incomes or deductions.  She was an intern, working 400 hours. She can be claimed, but no one will claim her.  *Assume" her earnings are $25. 

1099-R:

box 1: 3398+1250+25=4673

box 2a: 25

box 7: J, P

the rest boxes, all unchecked

Which year on form 1099-R: 2022

IRA interviews:

Q1: Enter your total Roth contributions for 2021, A: $6,000

Q2: Switch from a Roth to a Traditional IRA, A: No

Q3: Would you like us to track you Roth IRA basis, A: Yes

Q4: Withdraw from Your Roth IRA Before 2021, A: No

Q5: Enter Prior Year Roth IRA Contributions (Roth IRA contributions prior to 2021), A: $1,250

Q6: Any Roth IRA conversions, A: No

Q7: Enter Excess Contributions (Your Excess Roth IRA Contributions for Prior Years ), A: $1250

Q8: How much Excess to 2021 (indicate how much of your remaining excess contribution of $1,250 you want to credit toward your 2021 Roth IRA contributions, A: $1250, is this correct?

Q9: Contributions Withdrawn Before the Due Date 4/18/22, A: $4,648 (3398+1250), is it correct?

Form 1040:

Line 4a: 4673

Line 4b: 25

Line 8: 2800

Line 10: 198

Line 12a: 2952

Line 23: 399

Form 5329:

Line 19: 1250

Line 20: 0, is it correct?

Thank you so much for being so generous with your time and knowledge!  We want to send you a gift card for helping us through all these troubles.  Can we private message you?

[dmertz]

That all looks correct except that you need to include the $1,250 rollover on Form 1040 line 4a for a total of $5923 and the "ROLLOVER" notation on line 4b that comes from entering the code J Form 1099-R that reports the $1,250 distribution that will be rolled over by May 3, 2022.  Although the filing could be done now, I would complete the 60-day rollover of this $1,250 before filing. 

You'll also have the explanation statement describing the two separate returns of contribution, just listing the date(s) of the $6,000 contribution, the date (March 4), amount returned ($3,398) and gains ($20) for the first return of contribution and the date (March 7), amount returned ($1,250) and gains ($5) for the second return of contribution.  To get to this entry, be sure to click the Continue button on the page that lists the code J and code JP Forms 1099-R.

[Chris_99]

Thank you so much for fixing our mistakes again!

Update from her Roth account, now still pending

3/7/22  -1250 (rep said no March 4 removal, should we say March 7 excess removal now?)

3/7/22  -3398

3/7/22  -20.24

3/8/22  -1236.89 (a loss $13.11?)

Form 1040

Line 4a: 1250+3398+20.24+1250-13.11=$5905.13

Line 4b: 20.24-13.11=7.13 or 20.24-0=20.24, should it be 7.13?

We don't have accounts with Fidelity, she is a minor, to make things simple, we called Vanguard again, after 80 minutes wait, the rep said an indirect normal distribution can be done online, no mail-in check is required.

1.  Will Vanguard issue a separate 1099-R for this rollover?  The rep said it might be a combined form. I am confused, I create two 1099-R forms like you suggested:

First 1099-R.

Box 1: 4655.13

Box 2a: 7.13

Box 7: J, P

The rest boxes are all unchecked.

Second 1099-R

Box 1: 1250

Box 2a: 0

Box 2b: should "total distribution" be checked?

Box 7: J only?

Are the rest boxes all unchecked?

Q1: What did you do with the money from Vanguard?  I checked these two boxes:

- I moved the money to another retirement account (or returned it to the same retirement account)

- I rolled over all the money to another Roth IRA (or returned it to the same account)

Explanations:

7/8/2021, contributed $6,000 to 2021 Roth IRA

3/7/2022, returned ($3,398) and gains ($20.24) for the first return of contribution 

3/8/2022, returned ($1,250) and losses ($13.11) for the second return of contribution

Q2, do I need to mention the $1250 rollover here?

Q3, can I send her 2020 Fed return now?  That one is totally done, correct?

Q4, once the pending status is off, I will rollover $1250 back to her Roth.  How can Vanguard know this money will be her 2021 roth contribution made in March 2022?  Am I mixing things up again?

Thank you so much for your kind help!!!

[dmertz]

I'm not sure about line 4b.  When there is only a single return of contribution from an account in a given year, there is no reduction in taxable income for the loss attributable to the contribution being returned; the Form 1099-R would have a zero in box 2a.  When there are two returns of contribution from the same account where only one of them has an attributable loss, it's not clear to me if the two adjustments are aggregated (which in this case would result in $7.13 in box 2a) or if the attributable loss just disappears (which in this case would result in $20.24 in box 2a).  My guess is that they would be aggregated and box 2a will have $7.13.  The difference in tax liability between these two numbers is ordinary income tax (at your own marginal tax rate due to kiddie tax) and 10% penalty on $13.11, the difference between $20.24 and $7.13, which amounts to only a few dollars which the I doubt the IRS would pursue.

1.  The first Form 1099-R is a return of contribution, not a rollover.  I would expect the two returns of contribution to be reported on a single Form 1099-R which is why my guess is that the attributable gain of the first one will be aggregated with the attributable loss of the second one as you suggest for the code JP 2022 Form 1099-R.  This Form 1099-R gets reported on the 2021 tax return.

The second Form 1099-R is the code J 2022 Form 1099-R that you described and will be reported on the 2022 tax return.  Disregard what I said about doing the rollover before filing the 2021 tax return since this distribution and rollover has no effect the 2021 tax return.  Just make sure that the rollover of the $1,250 is completed by May 3, even if it has to be rolled over to a Roth IRA at a different custodian because of Vanguard's lack of understanding.

Q1:  Looks good.

Q2:  Nothing about the original $1,250 and its rollover goes on the 2021 tax return.  It goes on the 2022 tax return.

Q3:  Yes, the 2021 tax return is complete with regard to all of this.

Q4:  The deposit of the $1,250 is a rollover, not a new regular contribution.  It has nothing to do with yearly contributions.  Vanguard only needs to know that it's a rollover of a regular $1,250 distribution that was  received less than 60 day prior, a "60-day rollover."

[Chris_99]

Thank you so much for your generous help!  To be safe, I will put:

1099-R:

box 1: 3398+20.24+1236.89=4655.13 or should I put 3398+20.24+1250=4668.24

box  2a: 20.24

What do you mean, "at your own marginal tax rate due to kiddie tax"?  Do we need to re-do our 2021 tax because she can be claimed by us, but we won't claim her in 2021?

I deleted the 2nd 1099-R, yeah!  Here are the final numbers, do they look right?

Form 1040:

Line 4a. 4655

Line 4b. 20

Line 8. 2800

Line 10. 198

Line 12a. 2952

Line 23. 398

Form 5329:

Line 19: 1250

Line 20 (2021 distribution from your Roth IRAs): 0, is it correct?

We are almost done, correct?

For tax year 2022, how to answer these questions?

Q1. Withdraw from your Roth IRA before 2022?  yes or no?

Q2, Enter prior year Roth IRA contributions?  2602 or 1352?

Q3, Your excess Roth contribution for prior years?  0?

You've helped us so much - can I send you a Starbucks card or make a donation to your favorite charity?

[dmertz]

Disregard what I said about kiddie tax.  Your daughter's unearned income (which includes the taxable gains on the code JP 2022 Form 1099-R) doesn't seem to be enough to trigger that, otherwise her tax return would include Form 8615 to calculate the tax using information from your own tax return.

The numbers you listed all look correct.  You'll also see $20 on Form 5329 line 1.

For 2022:

Q1.  It doesn't really matter how you answer this question.  If you answer Yes, the text on the next page TurboTax reminds you that the basis in Roth IRA contributions does not include any contributions already distributed.

Q2.  In this case 2022 TurboTax should already know that the basis is $2,602 carried in from 2021.  Just make sure that 2022 TurboTax shows that.

Q3.  Correct.  The excess from prior years was resolved with the 2021 tax return.  2022 TurboTax should already know this from the transfer in of the 2021 tax file to begin the 2022 tax return.

I like to support animal shelters.

[Chris_99]

Thank you so much for your kind help, we really appreciate it!

Is there a specific local shelter you like or a link I can use to do the donations on your behalf?  Thanks!

[Chris_99]

Hello dmertz!

Thanks again for your generous help last year, we successfully filed my daughter's return!!!  

"When there is only a single return of contribution from an account in a given year, there is no reduction in taxable income for the loss attributable to the contribution being returned; the Form 1099-R would have a zero in box 2a.  When there are two returns of contribution from the same account where only one of them has an attributable loss, it's not clear to me if the two adjustments are aggregated (which in this case would result in $7.13 in box 2a) or if the attributable loss just disappears (which in this case would result in $20.24 in box 2a).  My guess is that they would be aggregated and box 2a will have $7.13"

I though you might want to know this details, I received the 2022 Form 1099-R, 

box 1 is $4655.29 (3398+20.4)+(1250-13.11)

box 2a is 20.40 (the attributable loss just disappears)

I remember you told me that this 2022 From 1099-R gets reported on the 2021 tax return, is that correct?

I also received a 2nd 2022 From 1099-R, I guess this is the regular distribution and rollover form, I will need to report this one on her 2022 tax return correct?

She also contributed $6k to her Roth IRA on 3/1/2022, but she didn't get a job during the summer, only received scholarships of $3500.  Does she need to request a return of contribution again?  Or can she rollover that money to her 2023 Roth?  She secured a summer intern job already, will be making more than $6k this year!

Thanks so much for your kind help!

[dmertz]

With only $3,100 of compensation to support the contribution for 2022, she has an excess contribution for 2022, there is a $2,900 excess contribution.  To avoid a 6%, $174 penalty on the excess she must obtain a return of contribution of the excess.  If she does not, she'll owe the 6% penalty for 2022 but can apply the excess as part of her 2023 Roth IRA contribution.

If she obtains a return of the excess contribution, she can do whatever she wants with the distribution, including using it to fund a 2023 Roth IRA contribution.

[Chris_99]

Hello dmertz,

Thank for the fast reply!  

She has only $3500 scholarship, which has no 1099 forms, so I entered that number into 1098-T interview page as scholarships.  So she has a $6000 excess contribution, the best way to fix the problem is to request the return of contribution, correct?

Questions:

1.  no need to file the 1st 1099-r with box 2a -$20.4?

2. plugged the 2nd 1099-r with box 1 - $1250, but I don't see this distribution on line 20 for form 5329, there is no form 5329 generated.

3. if I call vanguard and request the return of $6k, most likely it will be less than $6k, for example she might have a lost of $1200.  then I need to pretend I received a 3rd 2022 1099-r, and plug the numbers as below:

box 1- $6000,

2a - $0,

2b -?

box - J, P

box 16 -$6000

Thanks so much for your help!  BTW, since she has no income, do I need to do the above filing at all?

Chris

[dmertz]

Odd that the Form 1099-R shows a taxable amount of $20.40 rather than aggregating it with the $13.11 loss.  That doesn't agree with CFR 1.408-11with requires the gain or loss be calculated across the entire account.  Probably not enough to worry about.  The $20.40 is required to be included in income on the 2021 tax return.  Given the small amount, that might not make any difference in tax liability.  This 2022 Form 1099-R does not need to be entered into 2022 TurboTax, but if you choose to do so just to record it, TurboTax will ignore it other than to indicate that the $20.40 needed to be included on the 2021 tax return.

Given the odd calculation for 2021, I would not hazard a guess as to what they would do for the calculation of the distribution amount for a return of the $6,000 contribution made for 2022.

[Chris_99]

dmertz,

I thought you love knowing those details... no worries, because i followed your instructions very carefully and played it safe - i put $20.40 on form 1040 4b on 2021 tax form.  Now can I not to enter this 1099-r again in 2022 TurboTax?

Please tell me what to do with the $6000, I trust you 100% --everything you said was absolutely correct!!! If any tiny details are in doubt, I don't mind choosing the numbers benefit IRS the most - I truly don't mind paying more taxes to IRS as I just want to put this excess contribution nightmare behind...  help!

[dmertz]

You can enter the code-JP 2022 Form 1099-R into 2022 TurboTax if you like, but TurboTax will not include it anywhere on your 2022 tax return.  You don't have to enter it.

Exactly the same procedure would be used with the excess $6,000 contribution for 2022.