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

[dmertz]

@jtnguyen822 ,

Because the filing deadline for your 2019 tax return was extended to July 15, 2020, you could have received a distribution that was a return of contribution before the due date of your 2019 tax return, but that's not the distribution that you received.  The simplest course of action is to treat the distribution that you received as a distribution of the excess after the due date of your 2019 tax return, making the excess subject to a 6% excess-contribution penalty on your 2019 tax return but allowing the gains to stay in the Roth IRA.  This would have been the best course of action anyway if the gains at the time were more than something like 30%.  Regarding the penalty, you could just file 2019 Form 5329 to report the excess and pay the penalty.  Your 2020 Form 5329 would then show the excess carried in from 2019 and the code T distribution eliminating that excess for 2020.  No further distributions are needed to correct the excess.

The only other potential alternative would be to treat the code T Form 1099-R as erroneous, calculate how much of that gross distribution would be considered an amount of earnings proportionate to the remainder of that distribution, treat that as a return of contribution before the due date of your 2019 tax return with the earnings being taxable on your 2019 tax return.  For example, if the excess contribution was $5,000 and the gains were 25%, you could treat the $5,000 distribution as a return of $4,000 accompanied by $1,000 of gains.  However, that would still leave a $1,000 excess contribution in the account subject to a 6% excess contribution penalty on both the 2019 and 2020 tax returns, so I doubt that this approach would be all that beneficial compared to the first approach.  The viability of the second approach is also dependent on the examiner's willingness to accept it, with the fallback being the first approach if they don't.

[jtnguyen822]

@dmertz thanks for the quick reply.

I'll probably go with option 1 as that is the clean cut option.  So what are my next steps?  

1) Amend 2019 return and indicate I contributed to roth IRA and have excess contribution?  

2) Presumably this then will automatically trigger form 5329 to pay the 6%.

Make payment and mail the 2019 return.  Will there be extra penalty or interest owed on that amount?  Does turbotax calculate that?  When mailing the amended return what should I attach, if any, as additional support, or is there no need? I'd imagine I need to include a statement describing the entire situation?

In 2020 return, there will be carry over of the excess from 2019 and that it was withdrawn?

thanks

[aclsmb1smbacl]

Hello Dmertz,

I was hoping you could help me. I think I'm in a similar situation as  YellowJacket5219, but maybe not as far along in the process.

I recently discovered that I made an $32.00 excess contribution to my Roth IRA on 12/30/2020. I have yet to ask for the excess to be removed, although I hope to do so next week. I used the NIA formula and calculated that the interest was .69 so I understand I would ask for $32.69 to be removed from my 2020 Roth IRA account.

My question is:  Do I need to wait for a formal 1099-R document from my brokerage to file my 2020 taxes now (March 2021)? Or can I just use the 1099-R Substitute form (now with the numbers I calculated manually without having a formal 1099-R from my brokerage firm) in TurboTax to manually file the excess contribution withdrawal as income for 2020...although I will have withdrawn the money in 2021?    

Before reading a bunch of these threads, I thought my brokerage would not send me a 1099-R until 2022 since I will be withdrawing the money in 2021 and therefore, I would not or should not claim the excess contribution withdrawal as income until 2022 when I file my 2021 taxes...as the income is technically 2021 income based on the withdrawal date.   But if I'm following some of the threads correctly, it seems that I can and should use the 1099-R Substitute form in TurboTax to file the excess contribution withdrawal for my 2020 Roth IRA (to be withdrawn in 2021) in my 2020 tax return (as 2020 income)...although again the withdrawal will take place in 2021, is that correct?

Assuming again I should be claiming the excess contribution withdrawal of $32.69 (to be withdrawn in 2021) using a 1099-R Substitute form in my 2020 TurboTax return, can you please reconfirm the codes I should be/will be using when completing the 1099-R Substitute form in TurboTax...since, again, I will not have an actual formal 1099-R document from my brokerage firm at this point?

Thank you so much for any help/clarification you can provide!

[butimnotachef]

@dmertz 

Thanks again for your help, had followed your instructions and it was confirmed that the amount taxable became 0 after confirming the contribution basis and I had entered the 1099-R as was received without any changes.

Now when I try to wrap up the taxes however Turbotax refuses to let me proceed and says there must be a value in 2a (taxable amount) despite the fact that in 2b it says the taxable amount not determined. 

It was also already confirmed elsewhere when adding contribution basis that this was not taxable. I'm wondering if I should just be updating this with 0? But feel like I shouldn't be hand-updating any of the 1099-R I have received. Do you think this is a software issue and I should reach out to turbotax?

[pcarlson9]

aclsmb1smbacl

I just requested a return of an excess contribution to my Roth IRA for my 2020 tax return. My understanding of the excess contribution and earnings is that you would request the $32 excess from the company that you have your IRA with (mine had a form to fill out). The financial company not you will determine the amount of interest earned on the excess and return both to you.

Also was told I will not get a 1099-R for this transaction until 2022, but the earnings need to be reported on my 2020 tax return. I am current reading through this thread to see how to do that. So far it sounds like you enter a substitute 1099-R and the codes in box 7 will depend on when you got the excess and earnings returned. If I understand it correctly for my situation (excess was for 2020, taken back in 2021)  it looks like box 7 will be a P and J. Hopefully DMertz will confirm this info for both of us.

[dmertz]

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@aclsmb1smbacl wrote:

Do I need to wait for a formal 1099-R document from my brokerage to file my 2020 taxes now (March 2021)?

---

You can't wait to file because the code PJ 2021 Form 1099-R likely won't be issued until near the end of January 2022.  Do the return of contribution, then enter the 2021 Form 1099-R into 2020 TurboTax as if you have already received it.  Don't do a substitute Form 1099-R, that will prevent you from e-filing.  Entering a regular 2021 Form 1099-R serves only to get the taxable gains onto Form 1040 line 4b and the explanation that TurboTax prompts you to prepare is all that is needed.

Wait to file until you have received the return of contribution so that you will know exactly how much the gains will be as of the date of the distribution of the return of contribution and can enter the exact amounts in boxes 1 and 2a of TurboTax's 1099-R form.

[dmertz]

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@butimnotachef wrote:

Now when I try to wrap up the taxes however Turbotax refuses to let me proceed and says there must be a value in 2a (taxable amount) despite the fact that in 2b it says the taxable amount not determined.

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As I understand it, your distribution was a regular distribution in 2020, reported on a code J 2020 Form 1099-R, to correct a 2018 excess contribution.  For a code J Form 1099-R TurboTax expects bog 2a to be blank.  Did you mistakenly enter some code other than just code J into box 7 of TurboTax's form?

[pcarlson9]

@dmertz 

First Thank you for the info in this thread, I was able to use it to figure out how to handle my excess contribution for 2020.

But now that I am ready to finish up TT is telling me that I have to file form 5329 for tax on excess contributions or deductions? I am over 59 1/2 so shouldn't owe a penalty fee for early withdrawal. I removed my excess contribution and the earnings? Do I still have to file form 5329?

[dmertz]

Anyone over age 59½ who receives a code PJ Form1099-R that has a nonzero amount in box 2a must file Form 5329 claiming an Other reason exception to the early-distribution penalty on the box 2a amount.

[pcarlson9]

@dmertz 

OK Thank you. I did enter the 1099-R info as a PJ for box 7. Box one I entered 157.17 (144 excess  plus 13.17 earnings) and box 2a I entered 13.17 for the earnings.

I had hoped removing the excess I could avoid form 5329, but I guess I better go do it.

One last question. When we receive the actually 1099-R next year for the excess contribution and earnings. Do we  have to enter it anywhere on our 2021 10-40 or just attach it to the 2020 10-40 and forget about it.

[dmertz]

As long at the code PJ 2021 Form 1099-R does not show any tax withholding, there will be no need to enter it into 2021 TurboTax.

[pcarlson9]

@dmertz 

I was about to file today but wanted to look that 5329 over first.

On 5329 TT has Part I filled out, line 1 $13 and line 2 $144, with code 12.

But then TT has me paying 6% on an excess contribution (looks like for 2019).

On 5329 It has Part IV Additional tax on Excess contributions filled in and line 18 has $144, excess contribution from line 24 of my 2019 5329 form? And line 22 Prior year excess shows $144.  But I didn't have an excess contribution in 2019 and did not file 5329 in 2019.

I did indicate 2021 for my 1099-R that I entered for my return of the 2020 excess contribution plus earnings. I also entered that I had the $144 excess returned to me when TT asked that question. Reviewed my 1099-R's to ensure a duplicate of one didn't get entered.

What did I fill out wrong? What am I missing?

[dmertz]

When TurboTax asked if any of the penalty exceptions applied, you mistakenly entered $144 instead of $13.  Go back and correct that entry:  Other Tax Situations -> Additional Tax Payments -> Extra tax on early retirement withdrawals.

[pcarlson9]

@dmertz 

Thank You, but still not working out.

I went to Other Tax Situations, the Additional Tax Payments & Extra tax on early retirement. TT then asks  "Did you use your IRA to pay for any of these expenses?" & there is a list of things like Medical expenses, health ins, death etc & the last one is "Another reason" which is what I used, in there I put $13 (originally I had the $144 in there). I then had TT Review & update the return.

I then went to the updated Form 5329 and in Part I it had the $13 in lines 1 & 2, but still has Part IV filled in with $144 in lines 18, 22 and 24 as a 2019 Excess Contribution & 6 percent tax.

When I entered the 1099-R for this I put 157.17 in box 1 (144 EC plus 13.17 earnings) in 2a I put $13.17 for taxable. Box 7 PJ & Sep/Simple box checked. No other boxes are checked or filled out. I indicated it was a 1099-R for 2021.

[dmertz]

pcarlson9, you said that the excess contribution of $144 was made for 2020, not 2019.  Do you have a 2019 Form 5329 showing an amount on line 24?  If not, you mistakenly entered the $144 when TurboTax asked if you had any excess contributions for years prior to 2020.