Use Form 5329 to correct improperly coded IRA disbursement

[spencer00andrew]

I contributed to my Roth IRA in 2022 without knowing that my income was too high for me to contribute anything. I withdrew the initial contribution and earnings just after filing my taxes for 2022 (funds withdrawn after the filing due date). For 2023, I received a 1099-R that indicated the withdrawal was an early disbursement, rather than a removal of excess contribution. Fidelity claims they cannot recode this withdrawal, so I have to fix it some other way.

I understand that I should file Form 5329 to correct this issue. Can this be done through TurboTax? If so, how should I complete the form?

[DanaB27]

To confirm the Form 1099-R only has code J in box 7 and not code P and J? Did you withdraw the earnings with the excess contribution or only the excess contribution?

If you withdrew the excess contribution plus earnings then you could file a substitute Form 1099-R with codes P and J on your 2022 amended tax return:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

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

If you withdrew only the excess contribution without earnings then you will have to report the Form 1099-R with code J on your 2023 tax return. 

1. Click on "Search" on the top and type “1099-R” 
2. Click on “Jump to 1099-R” and enter all your 1099-Rs
3. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
4. Answer "Owned Any Roth IRA for Five Years?" screen
5. Continue through the questions and make sure you enter the net contributions prior to 2023 on the "Enter Prior Year Roth IRA Contributions" screen (include the excess contribution for 2022)
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 2022

 You will have to amend your 2022 tax return to pay the 6% penalty. Enter the Roth IRA contribution under IRA deductions in the Deductions & Credit section and TurboTax will calculate the penalty on Form 5329.

[spencer00andrew]

Thank you! A few follow-ups:

• Yes, confirming that I withdrew contributions + earnings, and there is just code J in box 7
• Your instructions say to amend my 2022 tax return. When I go to amend my 2022 tax return in TurboTax, it asks me "Did you get a 1099-R in 2022?" (not asking about 2023). Should I say yes to that to amend my 2022 return, or should I follow the instructions you provided on my 2023 return, and then separately amend my 2022 return?

[DanaB27]

Yes, you will answer "Yes" to "Did you get a 1099-R in 2022?" and then you can enter the 2023 Form 1099-R as a substitute Form 1099-R with the steps I mentioned in my previous answer.