topic Roth excess withdrawal done improperly in Get your taxes done using TurboTax

Roth excess withdrawal done improperly

frodrigu1 — Mon, 30 Mar 2020 14:33:08 GMT

I usually wait until April of the current year to contribute to my Roth. I then contributed the max only to find out that I over contributed by $780 due to a late payment by one of my clients. So reading in this forum, it stated that if I removed the excess prior to the filing dateline for 2019 tax returns, it would count as 'amount not contributed'. I then went into my online account, and removed the $780. My account shows the $780 removed as a 'subtraction' so I was happy the account was now correct. This year, I received a 1099R with an early distribution code. I called my plan administrator and asked why the 1099, and was informed that I had withdrawn the $780 as a distribution, therefore, the early distribution. I was also informed that I needed to correct the over contribution due to the fact that the over contribution was still there. I asked them why they could not correct the error, since it would just be paperwork to them.

I was told to fill out a form, requesting the amount to be withdrawn, and then they would ascertain how much to add to the excess $780 dollars, because the account would have to add the profits for the account. I use my Roth account and I invest as much of it in the stock market. My question to you out there is, why, if I took the excess out in 7 days, and only saw a $189 increase from the time I contributed, to the time I withdrew, do I have to add profits more the the $189 for that week? And , would you recommend, that I just go into an IRS office,(when they open again),, and talk to an IRS agent.. tnx

Re: Roth excess withdrawal done improperly

macuser_22 — Mon, 30 Mar 2020 15:54:11 GMT

An excess must be returned as a "return of contribution" and not a normal distribute. For a return of contribution, the account trustee is required to calculate the earnings attributed to the excess and report that in box 2a on a 1099-R form with a code JP in box 7 is this was a contribution for 2018 returned in 2019 or a code J8 if a 2019 contribution. Only the earnings, if any would be taxable.

If a 2019 contribution you can ask the financial institution if they would cancel the 1099-R and change it to a return of excess contribution (most financial institutions will not do that) so you are stuck with reporting the $780 as an excess on your 2019 tax return and paying the 6% penalty ($47). By paying the penalty, there is no need to worry about the earnings and they can remain in the IRA.

The 2019 1099-R that you received will not be taxable since is is your own contribution (TurboTax will ask for prior contributions).

That might be the simplest way to do it, just pay the $47 and be done with it.

However, I do not think you said which year the contribution was for. If this was a contribution *for* 2018, then it had to be removed before the due date of the 2018 tax return (Apr 15, 2019) to avoid a 2018 6% penalty and a normal distribution like you did is the only way to remove it.

Re: Roth excess withdrawal done improperly

frodrigu1 — Mon, 30 Mar 2020 17:43:35 GMT

Cuddos to you... This is by far the most reasonable answer I have received. This is how I will fix it.. thank you👏😊