topic Re: Excess Roth IRA Contribution in Retirement tax questions

Tax Year Prior to 2020: Excess Roth IRA Contribution

newmantax — Mon, 22 May 2023 22:32:12 GMT

In 2018 I accidentally contributed too much to my Roth IRA. When I filed 2018 taxes I paid the 6% penatly. Fast forward to now (March 2020), when I just discovered the error.

Getting ready to file 2019 taxes I noticed the 6% tax on the excess. Can I avoid the 6% excess penalty on my 2019 taxes if I remove the excess contribution before the 2019 tax deadline of April 15th 2020?

If yes I understand that I have my brokerage remove the excess. However I assume that I will not get back anthing

that actually verifies I removed the excess (1099-R?) before I file my 2019 taxes. How do I prove to the IRS I removed the excess before the 2019 tax deadline.

I guess I just need an understanding on if I can remove the excess in calendar year 2020 (before tax deadline) and not pay the 6% tax. IE how to report the excess plus interest was removed.

Re: Excess Roth IRA Contribution

VictorW9 — Mon, 09 Mar 2020 04:00:03 GMT

Get the custodian of the Roth to return the excess contribution and the earnings from the excess contribution. You will either wait and amend your 2019 return when you receive your 1099-R for 2019. Or you can enter a 1099-R with the information from the custodian with the excess contribution returned in box 1 and the earnings in box 2 which will be taxable along with codes JP on box 7. Then you will ignore the 1099-R you will receive next year. This way, you won't have to amend your 2019 return.

Re: Excess Roth IRA Contribution

newmantax — Mon, 09 Mar 2020 12:16:33 GMT

Thanks. I read something that said the earnings are taxable as income in the year the contribution excess was made. The excess contribution was made in 2018. I am removing it in 2019. Confusing part is will I receive 1099-R for 2019 or 2018?

Re: Excess Roth IRA Contribution

dmertz — Mon, 09 Mar 2020 13:03:03 GMT

Because your excess contribution was made for 2018, VictorW9's answer is incorrect. That answer is only correct for an excess contribution made for 2019.

Because the excess was not corrected in 2019, unless you are eligible to apply the excess as part of a 2019 Roth IRA contribution, you owe another 6% penalty for 2019 and, if you are not eligible to apply it as part of your 2020 Roth IRA contribution, you must obtain a regular distribution of exactly the amount of the excess, with no adjustment for gain or loss, before the end of 2020, otherwise you'll own another 6% penalty for 2020..

Re: Excess Roth IRA Contribution

newmantax — Mon, 09 Mar 2020 13:41:16 GMT

So you only have until the tax due date on the year the mistake was made to correct the Roth IRA over contribution. Every year after that you either pay the 6% or make the correction in the same calendar year?

Re: Excess Roth IRA Contribution

dmertz — Mon, 09 Mar 2020 13:46:19 GMT

Correct. You had only until the due date of your 2018 tax return, including extensions, to obtain a return of contribution that would have avoided a 6% penalty for 2018 and avoided carrying an excess into 2019. We are now close to 5 months beyond that October 15, 2019 extended deadline with respect to your 2018 excess contribution.

Re: Excess Roth IRA Contribution

newmantax — Tue, 10 Mar 2020 00:54:12 GMT

Thanks for your help. One last question, when I pull the excess contribution this year 2020 to avoid another 6% penalty, do I also pay 10% on the entire amount of excess that I pull since I am younger than 59?

Re: Excess Roth IRA Contribution

macuser_22 — Tue, 10 Mar 2020 01:01:49 GMT

No. Withdrawing your own Roth contribution is not taxable or subject to the penalty.

When you get your 2020 1099-R next year, enter it this way.

You can always withdraw your own Roth contributions tax and penalty free.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

One of the followup questions will ask for your prior year** contributions not previously withdrawn. Those contributions that still remain in the Roth will not be taxed or subject to a early withdrawal penalty. That will add a 8606 form to your tax return with the Roth contribution and tax calculation in part III.

Note: **Prior year - any current year Roth contributions should be entered into the IRA contributions section. They will not show up in the prior years contributions but will be accounted for on the 8606 form that calculates the taxable amount.

Re: Excess Roth IRA Contribution

adlamo — Wed, 11 Mar 2020 03:46:18 GMT

I have a similar question but different specifics. Here's my info:

May 2018: made Roth IRA contribution for 2018 tax year.
March 2019: realized when doing 2018 taxes that I contributed too much. Contacted company and pulled out entire 2018 contribution and any earnings (all were pulled out before 2018 tax deadline).
March 2020: received 2019 1099-R showing transaction described above.

Based on this feed, it seems that my transaction is taxable for 2018 even though the transaction actually took place in 2019. Therefore I will need to ammend my 2018 taxes. My specific questions are as follows:

Do I enter the 2019 1099-R on my 2019 taxes too?...or do i ignore it for 2019 since it will be amended into my 2018 taxes? It just seems weird to not use a 2019 form for my 2019 taxes.
When originally did my 2018 taxes in TurboTax, I stated that I did NOT contribute to my roth for 2018 (because I took out all the money I put in before the 2018 tax deadline). Is this correct, or should I have somehow indicated that i contributed but took everything back out?

Thanks!

Re: Excess Roth IRA Contribution

dmertz — Wed, 11 Mar 2020 13:18:41 GMT

You can enter a code JP 2019 Form 1099-R into 2019 TurboTax, but if it shows no tax withholding 2019 TurboTax knows to ignore it other than to remind you that the transaction was reportable on your 2018 tax return.

Entering the code JP 2019 Form 1099-R into 2018 TurboTax and telling 2018 TurboTax that it's a 2019 Form 1099-R will cause TurboTax to properly treat the amount in box 2a as taxable and subject to an early distribution penalty. If the box 2a amount was not already handled this way on your 2018 tax return, you must amend your 2018 tax return to add this.

Re: Excess Roth IRA Contribution

adlamo — Thu, 12 Mar 2020 01:05:26 GMT

Thanks for the response to my first question. Very helpful.

Can you please respond to my second question as well?

Re: Excess Roth IRA Contribution

dmertz — Thu, 12 Mar 2020 01:49:55 GMT

The result would have been no different had you entered the Roth IRA contribution, allowed TurboTax to indicate that it was an excess contribution and told TurboTax that you had the contribution returned. (Ideally TurboTax would prompt for an explanation of the return of contribution upon doing this, but TurboTax doesn't.)

Re: Excess Roth IRA Contribution

adlamo — Fri, 13 Mar 2020 01:58:39 GMT

Thanks so much for the info.

Just curious. If i had taken a loss on my excess contribution instead of making a gain, would that loss then be a deduction in my 2018 taxes (just like it was a taxed gain when i had a gain)?

I ask because i overcontributed this year too (for 2019 tax), and therefore i wanted to proactively enter the transaction when doing my 2019 taxes so i don't have to ammend later when i recieve the 1099-R. Would i just enter a negative number in box 2b since it was a loss?

Re: Excess Roth IRA Contribution

dmertz — Fri, 13 Mar 2020 02:12:15 GMT

" If i had taken a loss on my excess contribution instead of making a gain, would that loss then be a deduction in my 2018 taxes (just like it was a taxed gain when i had a gain)?"

In the case of an return of excess contribution from an IRA, unfortunately, no. No box on a Form 1099-R is permitted to contain a negative number.

Re: Excess Roth IRA Contribution

ThomasM125 — Fri, 13 Mar 2020 02:26:17 GMT

If you contribute less in one year than you are allowed to, that is the same as taking a distribution with regard to correcting a previous year over funding. So, you could just contribute an amount equal to your maximum contribution allowed for the year, minus the previous year's over payment, that would equalize the over payment without having to deal with a distribution.

Re: Excess Roth IRA Contribution

adlamo — Fri, 13 Mar 2020 15:35:01 GMT

So if sell my 2019 over-contribution for a net loss, I assume I will I still get a 1099-R for the transaction, but it will just show a 0.00 for box 2a. If this is the case, then:

Do I even need to enter anything proactively in my 2019 taxes to prevent having to ammend them when i get my 2020 1099-R? Other feeds have stated you can enter the transaction proactively knowing you'll get a 1099-R next year, but in my case, i will have a net loss, not a net gain. It seems i either could just not enter anything (since no gain), or proactively enter the transaction showing the zero gain.

Re: Excess Roth IRA Contribution

dmertz — Fri, 13 Mar 2020 17:20:47 GMT

If there is a loss such that box 2a shows $0, you don't have to enter the code JP 2020 Form 1099-R into 2019 TurboTax since doing so would have no effect.

Re: Excess Roth IRA Contribution

adlamo — Sat, 04 Apr 2020 14:57:07 GMT

Next year I will receive a 1099-R for the transaction, and it will show zero gain in box 2a (since excess contributions were withdrawn at a net loss), but there will still be info in box 1 showing I made a distribution. So even though I sold my excess contribution for a loss, shouldn't I still enter the information so the IRS knows there was a distribution? I had assumed yes.

So i guess my question is: assuming I "should" proactively enter the transaction into my taxes before i get the 1099R, what code will be in box 7 when there is zero in box 2a. Typically it is "PJ" when there is a gain, but will it still be PJ if I sold for a loss?

Thanks so much.

Re: Excess Roth IRA Contribution

DavidS127 — Sat, 04 Apr 2020 15:13:29 GMT

No, don't enter anything in your 2019 taxes if you withdrew the excess Roth before the due date of your 2019 tax return. And, because you have a loss for the period of time before the excess contribution was withdrawn, you won't need to amend your 2019 tax return when you get the 2020 1099-R because there are no earnings to report.

That 2020 1099-R will report the excess contribution minus the loss in box 1, a zero in box 2a and a code JP in box 7. The JP code tells that IRS that it was the withdrawal of an excess contribution from a Roth by the due date, and the zero in box 2a tells the IRS there is no income to report.

Re: Excess Roth IRA Contribution

adlamo — Sat, 04 Apr 2020 15:47:23 GMT

another related but different question (for past years):

Let's say I receive a 2019 1099-R for excess contribution removal with a taxable gain (box 2a has positive number) and code PJ, this means the taxes apply to 2018 and I must ammend my 2018 taxes to add the form. Am I correct that I DO NOT also enter that form into my 2019 taxes? Basically, the tax form should only be entered for 2018 taxes only, right?