Vanguard had told me that they are not willing to correct a upcoming incorrect 1099 R - what should I do?

[dadwith3incollege]

1) I contributed $7500 to a Roth IRA in December 2023, then immediately thought "I made a mistake, my W2 will be much lower than that - well, I'll just do an excess removal after I get my W2". What I didn't understand at that point is that since my wife works and makes over $15,000, under the spousal IRA contribution rules my wife and I were both eligible for the full $7500.

2) My W2 turned out to be 2438.64, so at the beginning of March I called Vanguard and had them remove 7500-2438.64=5061.36 + also 245.01 of earnings. 

3) I tried to do my taxes with the desktop version of Turbotax, but it absolutely wouldn't let me enter anything into form 5329 (excess IRA contributions). When I traced back the reason why, I found the worksheet that showed that I had no excess IRA contribution due to my wife's income. That made me research spousal IRA contributions on the IRA website. 

4) I called Vanguard and told them that I had made a mistake, and asked them to reclassify my withdrawal as a regular distribution. They basically said "no, you told us to go through the excess removal process, so in Jan 2025 we're going to send you a 1099 R for the removed contribution plus earnings with distribution code 8." (That's the timing of when they send a 1099 R for a 2023 excess contribution removal.) This, of course, will not match how I'm going to have to do my 2023 taxes, which will not be reporting a excess removal.

So I don't *think* I have anything special to do for my 2023 taxes because I don't thing I can do anything special for my 2023 taxes. But I want to make a plan now for next year so that I feel confident enough to recontribute the $5061 to my Roth IRA  before April 17th.    So far my thoughts are to either fill out a form 4852 (completely replaced and corrected 1099 R) or just change the distribution code from 8 to 7 in the Vanguard 1099-R I file.  Of course, the IRS would see that Vanguard says that it's 8 and I say that it's 7, which could cause problems.

Any thoughts?

Thanks,

Justin

[RobertB4444]

Since you're going to receive the 1099-R with the code 8 on it anyway then just enter the 8.  It makes it taxable in 2024 which is what would happen if it was a code 7, anyway.

For 2023 you can enter it as contributions to your IRA.  It's deductible this year and taxable next year.  Which is the reality of what happened.  

@dadwith3incollege 

[dadwith3incollege]

Thank you for considering my situation. My understanding of the difference between code 8 and code 7 is that a code 8 (excess contribution) distribution needs to be matched with a form 5329, which won't tax the principle of my removal because it's a Roth IRA, but it would tax the earnings. For me the 5329 and earnings tax would have been expected to be filed and paid with my 2023 taxes. Since Turbotax refused to let me file a 5329, I went ahead and filed my 2023 taxes without a 5329, which I believe is correct as I actually have no excess contribution. 

In another call to Vanguard they suggested doing an indirect rollover to put every dollar (both "excess contribution" and earnings) back into my Roth IRA. So I did this. They told me this will generate another 1099-R for the indirect rollover with either a code 1 or, more likely, 7.  They stressed that they will still send me the incorrect 1099-DIV with code 8, even though now all of the money is back in the IRA. So now I'm going to get two 1099-DIVs for the same amount of money, one correct, and one incorrect. My question is how do I get the IRS to ignore the incorrect duplicate 1099-DIV? Online searches have only given me answers from the perspective of entities that originate 1099s in the first place, investment firms, etc. 

Thanks for your thoughts!

[fanfare]

it would help to consider the tax consequences of Vanguard advice, before saying "Go ahead!"

Often the reps give bad advice and/or wrong answers.

[sweetwilliegrant]

My Vanguard reps NEVER offer me any tax advice. Instead they are so careful about disclaiming any/all tax implications that gets annoying because they won't even answer questions that have the smallest tax component to them.

[fanfare]

"excess plus earnings" does not involve Form 5329 when done before the tax due date including extensions, unless you  had filed a 5329 and need to correct it.

After the due date including extensions, "excess plus earnings" is no longer an option.

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No advice is better than wrong advice.