Withdrawals of contributions by due date 2

[mgc6288]

This has been an absolute headache with Vanguard.  My wife contributed $500 in July 2023 and then another $3000 in February 2024 for the 2023 contribution year into her Roth IRA.

Given our current financial situation, we decided it was best to withdrawal the $3500 before the tax filing due date. 

Reading page 30 of the IRS Pub 590b and the Secure 2.0 Act, it sounds like the 10% penalty has been waived where I only pay the income taxes on the $93.80 earnings.  

The 1099-R will be mailed in January 2025 with a code of PJ.  TurboTax says the P stands for the previous year return of contribution and the J stands for early distribution from a Roth IRA.  

So if I apply this code next year then nothing happens in TT as I imagine I'm supposed to file the $93.80 earnings with the 2023 1040.

If I open up TT for 2023 and add a 1099-R along with code 8J where the 8 stands for Return of Contribution taxable in 2023 as well as the J then I'm properly taxed but also assessed a 10% early earnings penalty. 

I'm guessing I add a 1099-R with only the 8 code but I technically did not receive a 1099-R and Vanguard says the J stays on there. 

The alternative is not add anything this year and then amend the 2023 1040 next year but I'm trying to avoid doing this.  

[fanfare]

enter it AS IF you got it and say it is a 2024 1099-R

You should see the total distribution and taxable amount on Line 4.

@mgc6288 

[mgc6288]

I do not see a "comment" section within the TT 1099-R area in order to state there will be a 2024 11099-R.  I only have codes to select.  The code that I will be receiving from Vanguard is PJ.  

If I enter PJ into the TT 2023 edition then it will be listed as a 2022 return of contribution.  

I'm guessing that I'm supposed to enter 8J as the code 8 signifies current year 2023 return of contribution.  

However, if I enter the J (early distribution from a Roth IRA) then I am assessed a 10% penalty on the earnings.  I thought it was established with the Secure 2.0 Act of 2022 that this penalty goes away starting with 2023.  So do I just not use the J even though next year the J will be on the 2024 1099-R?  Or does TT not realize this J should not penalize me?

Here is what I've entered so far:

Box 1: $3593.80  Gross Distribution

Box 2a: $93.80     Taxable Amount

Box 3: $93.80       Capital Gains

Code 8                  Return of contribution taxable in 2023

Code J                   Early distribution from a Roth IRA 

@fanfare 

[fanfare]

If you want to use code 8,

1. ) drop the code J
2. ) click to set the IRA/SEP/SIMPLE box.

Do not enter a capital gains amount !

@mgc6288 

[mgc6288]

Wow, I really appreciate your help on this.  Here's my boxes:

1) $3593.80    Gross Distribution

2a) $93.80       Taxable Amount

3) Blank            Capital Gains

7a) Code 8      Return of contribution taxable in 2023

7b) No second code

7c) Check the IRA/SEP/SIMPLE box as we assume the 1099-R that I'll receive next January 2025 will have this checked.

Boxes 3-6 and 8-16 are blank.

From reading online, it appears the IRA/SEP/SIMPLE checkbox is for traditional IRAs whereas this one is a Roth IRA.  Please verify and confirm your suggestion to check.

If we agree that this is about correct then I'll call Vanguard on Monday as I'll need their Federal ID Number, etc. as they put on the 1099-R.  TurboTax wants this information.

@fanfare 

[fanfare]

you are making up a 1099-R that does not exist.

If this disturbs you, as Henny Youngman would say, don't do that.

The other method with Code PJ also works.

you have to go through the interview to complete the process.

@mgc6288 

[mgc6288]

So in other words, I might as well just accept the fact that I have to amend my 2023 1040 next year once I receive the 1099-R in January?  This is so nonsensical.  

[fanfare]

No, enter a 1099-R so that the positive earnings to be included in income are included on 1040 Line 4b.

That's the line for Trad IRAs and Roth IRAs.

This is common and recommended.

@mgc6288 

[fanfare]

do you have a Roth IRA holding contributions made prior to 2023 ?

That makes a difference.

@mgc6288 

[mgc6288]

My wife started this Roth IRA account in June 2020 where she's made max contributions through 2022 and then reversed 2023's contributions.

@fanfare 

[fanfare]

Well, you can't use code 8 because you will get the wrong result, unless you set box 2a to zero.

With a Roth IRA, contributions come out first, so the $93.80 is a non-taxable return of contributions.

TurboTax should ask you about prior contribution amount when the code is " PJ".

@mgc6288 

[DanaB27]

You might want to check with your financial institution about the codes since some of the contribution for 2023 was made in 2023 and some was made in 2024. Generally, financial institutions will use this rule:

• If you made the excess Roth IRA contribution in 2024 for 2023 and then withdrew in 2024 then you will have code 8 and J on your 2024 Form 1099-R, and it will have to be reported on your 2024 tax return.
• If you made the excess Roth IRA contribution in 2023 for 2023 and then withdrew in 2024 then you will have code P and J on your 2024 Form 1099-R, and it will have to be reported on your 2023 tax return.

You will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of excess contributions made in 2023 for 2023 and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 return please follow the steps below:

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 2024 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 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

@mgc6288 

[fanfare]

IRS Pub 590-A:
"earnings are considered earned and received in the year the excess contribution was made."

The issue then becomes whether the correct distribution amount is shown on 4a this time. 

Amount included in income, -0- ,goes in 4b.

Form 8606 (not discussed yet) shows the amount of Roth contributions and conversions not used up by such a situation in an earlier year.

@mgc6288 

That's why you use tax software, that's what you're paying for.

@DanaB27 

You should add step 13 to your procedure. "TurboTax will ask you about any prior contributions."

[mgc6288]

That certainly is further that I had gotten as I wasn't expecting a 2023 / 2024 question after hitting continue.   I know that Vanguard will be listing the full amount with both P and J codes.

The J code though assesses a 10% penalty on my earnings but I thought the Secure 2.0 Act of 2022 removed all early withdrawal penalties if contributions were removed before the filing due date.  

Page 31 of IRS Pub 590b states:

Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the  contributions) by the due date of your return for the year in which you made the contribution, the  contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

TurboTax says the following about the codes, "For Form 1099-R, enter the distribution codes shown in box 7 on the actual Form 1099-R unless you know that the codes are incorrect."

If I leave the J code off then I'm not assessed the penalty, just the taxes on the earnings.  What is the downside risk to only listing the P code and not the J code?

@DanaB27 

@fanfare 

[fanfare]

Review Form 5329 Line 1.

When the amount included in income is zero, the penalty is zero.

@mgc6288 

The simplest solution is Code 8, IRA YES, taxable amount 0. You will be leaving out Form 8606.