What/how do I report a removal of excess Roth IRA contribution made in 2018?

[dmertz]

Mrohwf24, there  is nothing that needs to be corrected in regard to your 2020 Form 1099-R.  The reporting of just the $5,400 return of contribution on this form is correct because that's the only one that occurred in 2020.  The return of contribution that you obtained in January 2021 will be reported on a code PJ 2021 Form 1099-R next year.

The gains present in box 2a of that code PJ form 1099-R that you will receive next year still need to be reported on your 2020 tax return.  You can do that by entering this Form 1099-R as if you have already received it and include in your explanation statement the details of both of these returns of contribution.  When entering that 1099-R into 2020 TurboTax the code P will cause TurboTax to ask if it's a 2020 or a 2021 Form 1099-R, to which you must indicate that it's a 2021 Form 1099-R.  Box 1 needs to have the gross amount distributed (the amount returned plus gains) and box 2a must show only the gains.

[Mrohwf24]

@dmertz Thanks for your prompt reply. To be clear, the 1099-R I have in hand showing the $5400 excess distribution shows nothing in box 2a, but only the 5400 in box 1. How would I know what to enter for box 2a for the second, $4K installment 1099-R if it isn’t to be issued until this time next year? I assume in my case I won’t be subject to a 10% penalty for either tax year if I handle it correctly?

[dmertz]

If box 2b Taxable amount not determined is not marked on the code 8J Form 1099-R, the blank box 2a is apparently intended to mean that there were no gains in the value of the Roth IRA (or there was even a loss in value) while the contribution being returned was in the account.  If that's the case, the blank box 2a is intended to mean $0 (and $0 should really be present in that box).

With no taxable earnings to be distributed, there is no income tax or 10% early-distribution penalty on these distributions.

It does seem odd, though, that there would be no earnings.  2020 was a pretty good year in the stock market on average and even if the account was invested only in fixed-income assets it seems that there would be some gains.

[Mrohwf24]

@dmertz 

I agree with your comment about the 2020 stock year and the likelihood of gains. Let’s assume there were none in my case, though. Your comment about the $4K returned to me in 2021 needing to be included on my 20 return still has me confused, though. How would I report any of that distribution (and anything potentially on line 2a) if you’re saying that form isn’t to be generated until a year from now?

[dmertz]

You would enter a code PJ 2021 Form 1099-R as if you had already received it as I described in my reply to your first post.  You would know from the amount requested to be returned and the gain-adjusted amount distributed what amounts go in boxes 1 and 2a.

[YellowJacket5219]

@dmertz 

Found this thread while trying to finalize taxes.

Based on unexpected earnings, I over contributed to my Roth IRA in 2020.  I have corrected this and my custodian has withdrawn the excessive amount plus earnings, which happened in 2021.

The letter I received said the earning (which are taxable, based on age) would be reported for the year the excessive contributions were made (2020).  I won't receive a 1099-R until next year (2021) per the letter, but it appears I need to claim the earnings THIS YEAR (2020) as income.

So - I'm trying to create a substitute 1099-R.  I think I found the correct Box 7 codes on the IRS site (8 & J), but was unsure what Year I say the 1099-R is for?  I think it should be 2021, since that's the actual year the distribution was made.

Am I going in the right direction?

[dmertz]

@YellowJacket5219 , the correct codes for your 2021 Form 1099-R are P and J, not 8 and J.  Box 1 will show the entire amount distributed (returned contribution plus earnings) and box 2a will show just the earnings.

Code P on a 2021 Form 1099-R means taxable on your 2020 tax return.  (Ignore the drop-down text for 2020 TurboTax's code P selection for box 7, it assumes that it's a 2020 Form 1099-R).  When TurboTax asks the year of the Form1099-R, indicate 2021.

[butimnotachef]

So the 1099-R that you would get in 2020, is the way that you would indicate that the excess amount in 2018 had been withdrawn? When starting this years return it automatically says there is an owed amount based off the 6% fee. Even when putting the 1099-R in, that amount is still mentioned as owed. 

On the 1099-R, it only has the code J which I am guessing is since it was pulled after the tax filing deadline? It doesn't have the P - so does that mean the full amount that got pulled ends up being taxed as income? 

This seems like a really big penalty and more than just the 6% on the original excessive contribution amount per year. Am I missing something?

[dmertz]

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@butimnotachef wrote:

So the 1099-R that you would get in 2020, is the way that you would indicate that the excess amount in 2018 had been withdrawn? When starting this years return it automatically says there is an owed amount based off the 6% fee. Even when putting the 1099-R in, that amount is still mentioned as owed. 

On the 1099-R, it only has the code J which I am guessing is since it was pulled after the tax filing deadline? It doesn't have the P - so does that mean the full amount that got pulled ends up being taxed as income? 

This seems like a really big penalty and more than just the 6% on the original excessive contribution amount per year. Am I missing something?

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The code J 2020 Form 1099-R reduces the excess from 2018 by the amount shown in box 1 of this Form 1099-R (but to no less than zero if the distribution was more than the excess).  However, it seems that you have not yet entered your contribution basis.  Make sure to click the Continue button on the page that lists the Forms 1099-R that you entered and enter or confirm your basis in Roth IRA contributions made for years prior to 2020, including the contribution basis added by the excess contribution.  TurboTax will prepare Form 8606 to calculate of this distribution is subject to income tax and to an early distribution penalty.  That amount should be zero if no more was distributed than the amount of your contribution basis.

[butimnotachef]

@dmertz

Thanks so much for your advice and quick response! That's interesting - so to clarify you are referring to in the Deductions section where it asks about contributions to Roth/Traditional IRA where would put in this information about how much was contributed in prior years? I had assumed (incorrectly it seems) that this information would somehow be carried over from previous tax (as the 6% penalty amount got carried over without any action). 

When putting in the 1099-R forms in the income section, there is a few extra questions that get asked for where the distribution came, if any of the amount was spent on a house, etc. but no place to add in the information on contribution basis. 

[capntangen]

I read the whole thread and I think I understand but just clarifying. 

I removed 2019 excess ($670) in Jan 2021. I have the $40 (6%) on my 2020 taxes and I need to file an amendment for 2019 to pay the $40 for 2019. (Do I need to attach an explanation of why I'm amending somewhere? I saw that you're supposed to do that but I had Turbotax create the amended file and it didn't ask). 

And then I'm done? Will I get/file a 1099-R in 2021? Since I took it out in 2021, the fee won't apply again in 2021, right? 

Oh, also I don't think I need to file a CA state amendment for this, but do I need to tell CA that I amended the federal one? And if so, how would I do that?

Thanks so much! Just want to make sure I'm doing this right! I hired a CPA to ask questions, I called the IRS directly, I talked to the Turbotax live people, and I talked to my broker . . . and nobody knows what they're doing apparently because the CPA said I didn't need to file an amended tax return, the IRS said I needed to remove earnings too, the Turbotax live people always just want to look at my screen which wouldn't help anything, and the broker had no idea about tax implications. And all of that seemed wrong based on le google.

[dmertz]

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@butimnotachef wrote:

so to clarify you are referring to in the Deductions section where it asks about contributions to Roth/Traditional IRA where would put in this information about how much was contributed in prior years? I had assumed (incorrectly it seems) that this information would somehow be carried over from previous tax (as the 6% penalty amount got carried over without any action). 

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That's an alternative place to add this information.  Normally it's carried over from your previous year's tax file, but it seem that that's not the case if TurboTax is showing tax and penalty on the distribution this code J 2020 Form 1099-R.

Check Form 1040 line 4b to see if this income is truly being included as taxable and Schedule 2 line 6 to see if a 10% penalty is being included.  If either of these are present, TurboTax does not have the correct basis information.

[dmertz]

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@capntangen wrote:

I have the $40 (6%) on my 2020 taxes and I need to file an amendment for 2019 to pay the $40 for 2019. (Do I need to attach an explanation of why I'm amending somewhere? I saw that you're supposed to do that but I had Turbotax create the amended file and it didn't ask). 

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Correct.

No explanation is needed.  The fact that you are including Form 5329 is explanation enough.

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Oh, also I don't think I need to file a CA state amendment for this, but do I need to tell CA that I amended the federal one?

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I'm not aware of CA having any state excess contribution penalty or anything that would change on your CA tax return.

[butimnotachef]

@dmertz thanks again for your quick reply. Am trying that out - having some issues with correcting the contribution basis, but good to know this is likely the issue. 

[jtnguyen822]

@dmertz 

Hi  please advise on the following situation.

In March 2020 I made a contribution to my 2019 Roth IRA account.  After completing my tax return in June 2020 came to realize I exceeded the income cap.  At that time I put in a request with my broker to distribute the contribution which was prior to filing the 2019 tax return.  What I have now come to realize is that only the contribution amount was withdrawn and not the earnings, so now I am trying to figure out next steps.  Furthermore, the 1099-R for 2020 from the broker is coded as code T instead of a the code for withdrawal of excess contribution.  They will not change the tax form.

So my questions are:

1) I have determined the amount of earnings that should have been withdrawn had it been correctly calculated from March 2020 - June 2020, however given the earnings still remains in the account what implications does this have?  How would the earnings to remove be calculated now given its still in the account?

2) How do I correct my filings for this and do I need to withdraw the earnings now or do I pay a penalty and that earning can remain in the account?  Do I amend a 2019 filing? How does this get reported on the 2020 return? Given that 2019 contribution was removed but not the earnings, does that means I need to report the earnings balance as excess roth balance on the 2019 return and pay the penalty on that?  And pay it again in 2020 as its still in the account?  Am trying to get it removed now in 2021.

3) What do I do about the 2020 1099-R form with Code T which doesn't seem correct. Can I put an explanation statement on my tax return to explain that the amount distributed was a return of the 2019 excess contribution?

Thanks