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Level 2

Solved

Traditional IRA Excess Contribution

Forum|Forum|5 years ago
February 7, 2021
2 replies
0 views

I’ve made an IRA excess contribution in 2020 and I asked for the removal of that along with the earnings and my IRA Administrator (Fidelity) reversed them in January 2021. Form 1099-R will be available in January 2022 but I know all the calculation. As far as I understand:

1) I don’t need to pay 6% penalty fee because I did the reverse along with the earnings before the 2020 tax due date

2) I need to report the *interest* as gross income in 2020 tax year

3) I need to pay 10% early withdrawal penalty only on the interest because I am younger than 59.5

A couple of questions:

a) Can someone please help if I need to report #3 in 2020 tax year or not?

b) Is form 5329 required?

c) I understand I don’t have to wait for 1099-R then amend 2020 tax year return and that I can do it now. Can someone tell me how to use Turbo Tax for that? I found out a way that I can indicate reversing the excess contribution here* but not clear if this is all what I need to do for #2 and #3 above or I need to do extra steps.

* https://ttlc.intuit.com/community/retirement/discussion/help-with-ira-return-of-excess-contribution-request-was-made-2019-and-the-return-was-made-2020/01/1180078

Best answer by DanaB27

a)Yes, you will report the withdrawn contributions and earnings on your 2020 tax return (see letter c answer).

b) Yes, Form 5329 is required and will be created by TurboTax.

c)Yes, you will need to indicate in the contributions section that you withdrew the excess contribution otherwise TurboTax will still calculate the 6% excess contribution tax.

You will get a 1099-R in 2021 with codes P and 1. This 1099-R will have to be included on your 2020 tax return and you have two options:

You can wait until you receive the 1099-R in 2021 and amend your 2020 return or
You can report it now in your 2020 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 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

Login to your TurboTax Account
Click on the Search box on the top and type “1099-R”
Click on “Jump to 1099-R”
Select "I'll type it in myself"
Box 1 enter total distribution (contribution plus earning)
Box 2 enter the earnings
Box 7 enter P and 1
On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

DanaB27Answer

Level 15

a)Yes, you will report the withdrawn contributions and earnings on your 2020 tax return (see letter c answer).

b) Yes, Form 5329 is required and will be created by TurboTax.

c)Yes, you will need to indicate in the contributions section that you withdrew the excess contribution otherwise TurboTax will still calculate the 6% excess contribution tax.

You will get a 1099-R in 2021 with codes P and 1. This 1099-R will have to be included on your 2020 tax return and you have two options:

You can wait until you receive the 1099-R in 2021 and amend your 2020 return or
You can report it now in your 2020 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 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

Login to your TurboTax Account
Click on the Search box on the top and type “1099-R”
Click on “Jump to 1099-R”
Select "I'll type it in myself"
Box 1 enter total distribution (contribution plus earning)
Box 2 enter the earnings
Box 7 enter P and 1
On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

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moose007Author

Level 2

Thanks @DanaB27. That's helpful.

Should I also check the “IRA/SIMPLE/SEP” box in the 1099-R?

Also, to confirm, when I file my 2021 taxes, I should ignore 1099-R unless there’s withholding. By ignoring 1099-R, you mean I should also answer “no” to the question in the image below next year? (It should say 2021 and 2020 respectively)

DanaB27

Level 15

Yes, please check the “IRA/SIMPLE/SEP” box in the 1099-R.

Yes, you will answer “no” to the question “any excess IRA contribution before 2021”.

But also you don’t have to enter the 1099-R 2021 in the 1099-R entry section in TurboTax when you file the 2021 taxes unless there are withholdings.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

asonganyiz

Level 2

Hello,

While using turbotax, I got a notification that I contributed excess to my retirement accounts.. by an amount over $2000 and I was told to complete the return of excess contributions. I forgot to do this in April and just realized that. What do I need to do and what are the implications?

Thanks

macuser_22

Alumni - Champ

@asonganyiz wrote:

Hello,

While using turbotax, I got a notification that I contributed excess to my retirement accounts.. by an amount over $2000 and I was told to complete the return of excess contributions. I forgot to do this in April and just realized that. What do I need to do and what are the implications?

Thanks

Assuming you mean an IRA and not an employer account like a 401(k) then:

If this was a 2020 excess then you have until the extended due date to remove it as a "return of contribution" without penalty if you filed for an extension before May 17 or if you filed your tax return before May 17, which is an automatic extension. The financial institution will issue a 1099-R with a box 7 code for a return of contribution and not a normal distribution.

Per IRS instructions in Pub 590B https://www.irs.gov/publications/p590a#en_US_2020_publink1000231027

If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with "Filed pursuant to section 301.9100-2" written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.

If not removed by then or you did not file in time or have an extension, then you will owe a 6% penalty that repeats every year until removed with a normal distribution.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**