I learned this year that I was ineligible to make Roth IRA contributions in 2018 and 2019. I learned that I can recharacterize my 2019 contributions as Traditional IRA contributions. I was told that I should not report this on my tax form but, instead, attach a statement to my tax form with this recharacterization.
My next step is to withdraw my excess contribution made in 2018 since I can’t recharacterize it. I was told that I can keep the earnings in the Roth IRA account. However, I don’t know what the reporting rules are. I know that I have to pay a 6% fee on the contribution because it was in the account for a year. Should I expect to receive something from the financial institution and do I report it this year? Do I have to amend last year’s tax return?
Yes you will receive a 1099-R from the financial institution once you withdraw the excess contribution. The 1099-R for the withdrawal will have the year 2020 on it since you did not withdraw the funds until 2020.
If you withdraw the excess contribution in 2019 and you have not yet filed your tax return, you can report the withdrawal so you are not charged the 6% penalty for 2019.
To report the withdrawal you create a substitute 1099-R
Thank you! Just to make sure I have it right, I learned about this error last and week and am in the process of withdrawing the 2018 excess contribution now before doing my 2019 tax return. Can I submit the 1099-R on my current return and avoid paying the penalty for 2019? In that scenario, I think I’d just have to pay the penalty for 2018.
Yes you can report the withdrawal of the excess contribution on your 2019 return.
The codes you will need for box 7 are J and P.
Since this is a Roth IRA the only amount that is taxable are any earnings on the excess contribution.
You will receive a 1099-R for the withdrawal in 2020 you do not need to report the information since you have reported it on your 2019 tax return.
DianeC958's answers do not apply to your situation. They only apply to a return before October 15, 2019 of a contribution made for 2018.
The distribution of your 2018 excess contribution will be reported on a code J 2020 Form 1099-R. You'll enter this into 2020 TurboTax next year to eliminate the 6% excess contribution penalty for 2020 and beyond.
No, you can't avoid the penalty for 2019, because you did not correct the excess for 2018 before the end of 2019. In addition to the 6% penalty you have on your 2018 Form 5329, you have another 6% penalty for that amount on your 2019 Form 5329.
OK, so just so I fully understand, I essentially don’t report anything this year? I only attach a statement to my 2019 return to say that I re-characterize the Roth IRA contribution from 2019 into a traditional IRA. And then in 2020 I file the 1099 – R with the 2018 excess IRA withdrawal?
With respect to the 2018 excess contribution, the only thing that will be included with your 2019 tax return will be the 2019 Form 5329 showing the 6% penalty on that contribution that remained uncorrected in 2019.
I'm in a similar situation... only a bit different.
In December, 2019, I realized that I would have MAGI over the lower Roth income limit, but not over the upper limit. Which is to say, I could make some Roth contributions, but not the full amount. I re-characterized part of my 2019 contributions removing the excess contribution and attributed losses. Unfortunately, I underestimated my 2019 MAGI such that I had not re-characterized enough of my 2019 contributions. I have submitted the documents to my broker (on 2/14/2020) to re-characterize the additional contributions and attributed gains.
In TT I am at a step that informed me of the excess contribution and potential penalty, and is asking "Enter any contribution that you withdrew before April 15, 2020." -- "Contribution Withdrawn Before Due Date of Your Return ______"
If I'm re-characterizing my 2019 contribution, do I enter the excess contribution here? Or do I go back to the steps where I entered the previous re-characterization information and adjust the values? Should I expect an updated 1099-R and 5498? Or an additional 1099-R and 5498? Do the gains of my second re-characterization apply to 2019 taxes, or 2020?
rkierski, no you do not enter any amount there. That question is asking if you did a return of contribution, not a recharacterization. You'll need to go back and correct the amount you entered as the amount recharacterized to show the total recharacterized. (When entering the amount recharacterized, do not include the amount of gains included in the transfer.)
No, you will not receive any updated 2019 Forms 1099-R or 5498. You'll receive a code R 2020 Form 1099-R reporting the amount of your 2019 contribution recharacterized in 2020. If you enter the code R Form 1099-R into 2020 TurboTax TurboTax will remind you that the recharacterization should have been reflected on your 2020 tax return. Since you will have done that, you can ignore the code R 2020 Form 1099-R when you receive it. You'll also receive a 2020 Form 5498 showing the recharacterization contribution to the traditional IRA.
Gain attributable to a recharacterization do not affect your tax return in any way. They simply change from being gains in the Roth IRA to being gains in the traditional IRA.
Hello! Follow up question - can I amend my 2018 tax return through TurboTax and complete form 5329? I had tried to search for it on the website but don't see anything about the form.
In what section do I report the excess contribution in TurboTax? When I spoke with a TurboTax rep yesterday, he couldn’t find where I should report the excess contribution and, as a result, 5329. He seemed to tell me to report everything at once next year. But that didn’t sound right.