topic Re: Excess Roth IRA contribution clarification needed in Retirement tax questions

Excess Roth IRA contribution clarification needed

Anonymous — Mon, 03 Feb 2020 01:53:36 GMT

I made a 1500.00 excess contribution to a Roth IRA in Oct 2019. The excess contribution and the earnings ($116) on the excess were withdrawn in Jan 2020. I do not have any updated tax forms from the brokerage and do not know if I will get them, if at all, before the tax deadline. How would this be entered into TurboTax? Do I enter $7500 which then tells me I made excess contribution or do I enter $6000 for the Roth contributions? I am under 59-1/2 so I know I have to pay a penalty (10% I think) on the $116. I do not have a updated 5498 or 1099-R. I read a similar post where Macuser_22 answered the post but Im still a bit confused how EXACTLY to enter it in TT.

Re: Excess Roth IRA contribution clarification needed

DaveF1006 — Mon, 03 Feb 2020 02:22:48 GMT

You tell TurboTax that the excess has been removed so a penalty is not applied and the excess does not carry forward. You would enter $7500 as the total amount of your contribution. As you proceed with the entry, Turbo Tax will indicate that you have an excess contribution of $1500 and will ask you if you plan on withdrawing this before the due date of your return.(April 15)

Since you have already withdrawn the excess contribution, you will say "yes".The penalty will not be applied based on this answer..

To enter your Roth IRA contribution:

On the left side of your screen, click Federal.
At the top of your screen choose Deductions and Credits.
Scroll down to Retirement and Investments.
Click Start on Traditional and Roth IRA Contributions.

Re: Excess Roth IRA contribution clarification needed

Anonymous — Mon, 03 Feb 2020 05:43:35 GMT

Thank you very much for that answer. If I may,. I'd like to ask a couple follow up questions... It asked for the value of my Roth IRA's on Dec 31, 2019. Which I obviously add all my Roth balances together that I contributed to in 2019 as of Dec 31. Question is, should that amount include my excess contribution and excess earnings?

Secondly, where do I enter my earnings on excess contribution of I don't have a 1099-R?

Thank you in advance

Re: Excess Roth IRA contribution clarification needed

DaveF1006 — Mon, 03 Feb 2020 23:37:53 GMT

1) Just enter the amount of your Roth value without the excess earnings amount.

2) Next, you will receive a 1099R next year to report your 2020 tax year. The 1099R will show the amount of the total Distribution plus the excess earnings amount in Box 1 and then show just the taxable amount of the distribution in Box 2A, which should just be the excess earnings amount. IRS will know the amount of the contribution you returned because there will be a code P in box 7 indicating that it is a return of capital. Any amount taxable in Box 2A will assumed to be excess earnings.

The reason why you will report excess earnings on 2020 return is because you received it in 2020 thus it is 2020 income to be reported on your return. Don't report it for tax year 2019.

Re: Excess Roth IRA contribution clarification needed

Anonymous — Tue, 04 Feb 2020 14:12:33 GMT

Sorry for the dumb questions. So I won't have to file an amended return if I wait until I receive the 1099R and report it in 2020's taxes correct? I was also told to report the $7500 contribution ($1500 excess) and create a place holder or mock 1099R this year to get it out of the way. Do you have a suggestion as to which way is better?

Re: Excess Roth IRA contribution clarification needed

DanaB27 — Tue, 04 Feb 2020 20:56:02 GMT

You should receive in 2021 a 1099-R for the year 2020 with a code P which stands for "Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2019". Therefore, it will have to be included in your 2019 taxes. You have two options:

Wait until you get the 1099-R and amend your 2019 tax return.

Try this solution How to create 1099-R for return of excess contributions to create a 1099-R

Re: Excess Roth IRA contribution clarification needed

PandR2020 — Thu, 09 Apr 2020 02:13:15 GMT

Dave,

There seems to be a lot of conflicting answers concerning the tax treatment of the withdrawal of excess contributions and earnings to a Roth IRA. Some people are saying that you need to create a "dummy" 1099-R to use when filing your 2019 return because the earnings are taxable in 2019, and if you wait until you receive your 1099-R in 2021 then you will have to amend your 2019 return. However, you say this is not the case. Instead you say the withdrawn earnings are taxable in the year they are withdrawn. Therefore, you should wait for the actual 1099-R in 2021, and you will not have to amend your 2019 return. Do you have IRS documents or other documents that explain this or make it more clear?

A lot of the discussion seems to be around the code used in Box 7. Looking at https://www.irs.gov/pub/irs-pdf/f1099r.pdf it says that if code 8 is selected then it would be taxable in the current tax year, but if code P is selected then it would be taxable in the prior tax year. So if code P is selected then wouldn't an amendment be required for the prior tax year?

Looking at the 1099-R that will be sent out in 2021 it reads:

8—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2020.

P—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2019.

Thanks

Re: Excess Roth IRA contribution clarification needed

PandR2020 — Thu, 09 Apr 2020 03:50:58 GMT

This seems applicable as well:

https://www.law.cornell.edu/cfr/text/26/1.408A-6

Q-1. How are distributions from Roth IRAs taxed?

(d) Contributions that are returned to the Roth IRA owner in accordance with section 408(d)(4) (corrective distributions) are not includible in gross income, but any net income required to be distributed under section 408(d)(4) together with the contributions is includible in gross income for the taxable year in which the contributions were made.

Re: Excess Roth IRA contribution clarification needed

macuser_22 — Thu, 09 Apr 2020 04:13:53 GMT

@PandR2020 wrote:

Dave,

There seems to be a lot of conflicting answers concerning the tax treatment of the withdrawal of excess contributions and earnings to a Roth IRA. Some people are saying that you need to create a "dummy" 1099-R to use when filing your 2019 return because the earnings are taxable in 2019, and if you wait until you receive your 1099-R in 2021 then you will have to amend your 2019 return. However, you say this is not the case. Instead you say the withdrawn earnings are taxable in the year they are withdrawn. Therefore, you should wait for the actual 1099-R in 2021, and you will not have to amend your 2019 return. Do you have IRS documents or other documents that explain this or make it more clear?

A lot of the discussion seems to be around the code used in Box 7. Looking at https://www.irs.gov/pub/irs-pdf/f1099r.pdf it says that if code 8 is selected then it would be taxable in the current tax year, but if code P is selected then it would be taxable in the prior tax year. So if code P is selected then wouldn't an amendment be required for the prior tax year?

Looking at the 1099-R that will be sent out in 2021 it reads:

8—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2020.

P—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2019.

Thanks

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2019 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2020 1099-R into the 2020 tax return since the withholding is reported in the year that the tax was withheld. The 2020 code JP will not do anything in 2020 but the withholding will be applied to 2020.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2018 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2020 1099-R. - That makes it taxable in 2019 and not 2018

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2020.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

Re: Excess Roth IRA contribution clarification needed

PandR2020 — Thu, 09 Apr 2020 21:26:55 GMT

Thank you for the quick reply, CHAMP.

DaveF1006 would you agree with this reply? Would you be able to read my previous post and let me know what your interpretation is?

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

vcwu — Wed, 23 Dec 2020 17:38:12 GMT

If I need to remove excessive contribution on my Roth because of the AGI has just reached the range of reduced amount, the allowed contribution will vary based on my income (of final income).

Assuming I will do the excessive removal in early 2021 (on a 2020 contribution) before I file my tax return in April 2021 for the Tax Year 2020. I will also have a Net Income from return of investment on the excessive contribution.

If this Net Income (or additional income to be determined) is to be reported in the next year (Tax year of 2021, then my AGI for 2020 does not change and I can calculate the amount I need to remove from my Roth contribution ( in regardless of what the Net Income amount would be).

However, if the Net Income needs to be reported in Tax Year 2020, it will increase my AGI and therefore, readjust my allowable contribution and I would not know the exact right amount to be "remove". Like going into a loop.

Would you clarify what is the right way to report it with Turbo Tax ? I would not know how the IRA Custodian would label P, J or the code for my 1099R at this point.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

macuser_22 — Wed, 23 Dec 2020 20:51:47 GMT

@vcwu wrote:

However, if the Net Income needs to be reported in Tax Year 2020, it will increase my AGI and therefore, readjust my allowable contribution and I would not know the exact right amount to be "remove". Like going into a loop.

Would you clarify what is the right way to report it with Turbo Tax ? I would not know how the IRA Custodian would label P, J or the code for my 1099R at this point.

You have that right. Many people fall into that trap - they remove the exact amount of the excess and do not allow for any earnings which when added to their AGI will create a new excess - in a loop. You should have more then just the exact amount of excess returned to make room for the earnings.

If this is a 2020 excess and will be returned in 2021 then the 2021 1099-R will have a box 7 code of "PJ" with the returned amount in box and and the earnings in box 2a. You will have to amend 2020 to add that when you receive the 2021 1099-R unless the IRA custodian will give you the exact amounts that will be on the 2021 1099-R so you can enter a dummy 1099-R into your 2020 tax return which would avoid having to amend when the actual 1099-R is received.

On a 2021 1099-R code "P" means returned in 2021, but taxable in 2020. Code "J" means that it is a Roth IRA.

(If returned in 2020 then it would be code "8J" with the "8" meaning that it is returned in 2020 and taxable in 2020.)

Also see box below:

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2020 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2020.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

dmertz — Wed, 23 Dec 2020 21:19:24 GMT

The alternative is to recharacterize the excess Roth IRA contribution to be a traditional IRA contribution instead, either deductible or nondeductible depending on whether you or your spouse is covered by a workplace retirement plan. The earnings will accompany the excess moved to the traditional IRA, resulting in no taxable distribution of the earnings and no need for an iterative calculation loop.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

vcwu — Mon, 01 Feb 2021 15:47:34 GMT

As I read and digest this, it seems it may be better to do the carry over and pay the 6 % penalty instead of remove the excess. The reasons are:

The Roth account where the excess contribution was made have gone up. With excess contribution of $7K, almost 60% << (ACB-AOB)/AOB >> of it is Net Income ~= $4200. I will be paying over 25% in federal and state income tax on it.

I can carry over the whole $7K excess to next year Roth IRA contribution ( I qualify for the $7K limit next week with no issue). If so, I pay 6%, $420 penalty this year with Form 5320 this year. There is no distribution this year or next year of any form. I got to keep all current balance in the Roth IRA account and there is no Net Income to report.

Unless I miss something, the carryover as remedy seems to be a simpler and tax benefit solution.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

dmertz — Mon, 01 Feb 2021 16:07:29 GMT

vcwu, I agree that that would be a reasonable approach. I've done the same in the past for the same reason.

Your 2021 tax return will include 2021 Form 5329 to report that the $7,000 excess contribution for 2020 has resolved by applying the $7,000 as your 2021 Roth IRA contribution.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

vcwu — Sun, 07 Feb 2021 22:52:27 GMT

Do I need to tell my Roth IRA custodian about the Carryover or they don't need to know? It is between me and IRS.

I guess carryover does not generate any distribution or removal of gain from contribution so basically no change to my Roth IRA account. I will not get any 1099-R or any Form ( Is there one for Carryover) from the Roth IRA Custodian.

In 2022, what I need to do is to fill the Form 5329 by myself to report the $7K excess contribution in 2020 and pay my $420 excise tax. I do want to keep the money in Roth .

Thank for clarify this.

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Just wonder. Alternatively , after the time allowed for Eliminating excess contribution, I can fix it by making Ordinary Distribution of $7K (or it needs to include the gain) with no tax consequence (on earned interest). As I just turn 60 year old, I don't pay early withdrawal penalty or income tax on distribution. Since I rather leave more in the Roth IRA for growth, it would be better to pay the $420 excise tax once in order to keep the $7 contribution and its large gain of interest untouched din the Roth account.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

dmertz — Mon, 08 Feb 2021 00:32:51 GMT

Excess contributions are between you and the IRS.

after the time allowed for Eliminating excess contribution, I can fix it by making Ordinary Distribution of $7K (or it needs to include the gain) with no tax consequence (on earned interest).

Yes, after October 15, 2021 but no later than December 31, 2021 you could make a regular distribution of $7,000 with no adjustment for earnings, eliminating the excess for 2021 and beyond.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

vcwu — Mon, 22 Feb 2021 19:34:55 GMT

Thank you.

On carryover/absorption (that my allowed 2021 Roth IRA contribution limit will completely eliminate the excess in 2020), what is the best way to report with Turbotax?

Seems 2020 5329 can only report 2020 excessive contribution. In 2021 tax return with 5329, I won't have the 2020 5329 excessive amount to base on and therefore , IRS requires me to amended 2020 tax return with the 2020 5329 to report the excess.

If I am okay paying the excise tax now, would it be simpler with TurboTax that :

1) I report the excessive contribution on 5329 in 2020 and pay the excise tax.

2) In 2021, I follow through with the 2021 5329 to report Zero excessive contribution (by absorption)

3) I don't need to amend my 2020 tax return or its 5329.

Is it allowed or doable?

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

dmertz — Mon, 22 Feb 2021 20:12:41 GMT

In 2021 tax return with 5329, I won't have the 2020 5329 excessive amount to base on and therefore , IRS requires me to amended 2020 tax return with the 2020 5329 to report the excess.

You said that the excess contribution for 2020 that will remain unresolved before the due date of your 2020 tax return. That's the amount that will be on line 24 of your 2020 Form 5329 when you file and the amount that will transfer to line 18 of your 2021 Form 5329. The 2020 Form 5329 will result in the $420 penalty being part of your tax liability from which your 2020 refund or balance due will be determined. There will be nothing to amend with regard to your 2020 tax return because you will already have reported the excess contribution and paid the additional $420 of tax.

Re: Excess Roth IRA contribution clarification needed - Which year to report the Net Income

vcwu — Sun, 28 Feb 2021 17:00:06 GMT

Thank you. It is all clear. For those reading this thread the 1st time, the advises were all clear and correct .

Let's clarify it more:

The discussion was originally focus on people wants to correct their excess contribution in the year and/or to avoid paying the excise tax. It also addressed people that do not aware of the "excess contribution" and retro reporting/fixing the issue with IRS. File and pay the excise tax ASAP is sort of at the bottom of consideration.

My case turns be to be extreme opposite. I know about the excess contribution (honor mistake) and decide paying the excise tax is the best financial option for me AND is able to use absorption /carry-over to eliminate the all excess contribution the following year. As a result, the correct tax filing process for me is do report the excess contribution and pay the excise tax on my tax return now (with 5329) and the following year tax return will pick up the rest with another 5329. So it is straight forward, simple, easy and not to worry about any Net income & tax consequence,...etc.

Without tax professional to review my case in details, the most work for me is to study the various correction options & schedule, tax filing options and to determine what is best financial case and tax reporting for my case.

Thank you for all advises and DMERTZ. The thread is now close ( for me).