topic Re: Withdrawing excess contribution for 2019 in Retirement tax questions

Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 03:13:30 GMT

I just got my 1099-R form from Vanguard for 2020 and it shows 6000 in Box 1 and 1P in Box 7 which means it is an early distribution before 59 1/2. Box 2b is also checked (taxable amount not determined).
Turbo tax does not include that in my taxable income or calculate any tax on it when i upload the statement.
Actually this was my traditional IRA contribution for 2019 and I realized that I am not allowed to do a deductible IRA. I checked with the broker's representative that i may want to convert it to Roth (backdoor) but if could withdraw it then and would it have any impact. She said that she can revert the transaction as I was not eligible for a deductible IRA and therefore i got the money back in my bank account. I had 5.09 of gain on that contribution so that was also paid to me.
How do i report this to the IRS in my 2020 tax return. Do I have to pay early withdrawal tax on the 6000 contribution ? Is 1P the right code if it was a mistake to deposit that money in IRA?
Do i need to fill form 5329 and if yes then would it be for 2020 and would it show the 6000 or just 5.09 and if yes, in which section?
Thanks for your help.

Re: Withdrawing excess contribution for 2019

ThomasM125 — Tue, 09 Mar 2021 04:44:48 GMT

The code "P" means the distribution belonged on your 2019 tax return, so it won't affect your return for 2020.

You need to amend your 2019 tax return and enter the distribution on that tax return. To report the earnings on the excess contribution, you should enter a Substitute form 1099-R and enter it on your amended return. You will see an option for this when you see the screen Tell us Which 1099-R You Have.

Enter in box 1 the distribution amount. In box 2 enter the earnings. Enter code "P" and "J" in box 7. Work through the questions in TurboTax after you entered the 1099-R until you see a question regarding why you made the distribution, to which you will respond it was a return of an excess contribution.

Code "P" is the right code. You will pay a 10% penalty, but only on the earnings. You will have a form 5329, that TurboTax will generate automatically.

Re: Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 05:21:47 GMT

Thanks for your reply. So Do I need to got to the 2019 Turbo tax program and enter 1099-R there even though i received the 1099 form for 2020?

Which documents should i send with my 2019 amendment? Form 1040 amendment (no change to the numbers i think), a 5329 and anything else?

Re: Withdrawing excess contribution for 2019

DanaB27 — Tue, 09 Mar 2021 14:20:07 GMT

Yes, you need to amend your 2019 tax return to include the Form 1099-R 2020 because of the code P. Please see How do I amend a 2019 return in TurboTax? on instructions how to start your 2019 amended return. You will have to send the Form 1099-R, Form 1040X, and any Forms that changed: 5329, Schedule 2 and the new 1040.

The IRS states:

"You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. "

Therefore, the earnings on the 2019 excess contribution have to be reported on your 2019 return.

Re: Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 18:04:24 GMT

Thank you.

Given that the gain of 5.09 has been added to my 2020 tax return in Turbo tax, I believe I should take it out and put it under 2019 return. How do i do that? Delete that record from 1099-R entries for 2020 in Turbo tax?

And should i fill a substitute 10099R for 2019 or upload the 2020 only with the two entries related to excess withdrawal and gain?

Thanks,

Re: Withdrawing excess contribution for 2019

DanaB27 — Tue, 09 Mar 2021 19:45:46 GMT

Your 1099-R 2020 for a return of the 2019 excess contribution and earnings should have the contribution plus earnings in box 1 $6,005.09 and in box 2a the earnings $5.09 with code 1P and box IRA/SEP/SIMPLE checked. This 1099-R need to be added to your 2019 amended return.

If you did not receive such 1099-R then you might want to contact Vanguard for the correct 1099-R because if you enter things different than what it is reported to the IRS then it can cause confusion.

Re: Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 20:26:52 GMT

Thanks for your reply and your patience.

I contacted Vanguard and they tell me that since the contribution was made in 2020 (for 2019) the earnings on that excess would be taxed in 2020 and hence a separate line for 5.09 of earnings with code 81 in Box 7. He tells me that i would need a 5329 for 2020.

So the question then is:

For 2019, I believe i have to amend my return and show this excess contribution by adding my 2020 1099-R for the excess contribution amount of 6000. Or should it be a substitute 1099R?

For 2020 how do i get Turbo tax to generate a 5329? It does add this 5 dollars to my taxable income though.

Thanks again

Re: Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 20:31:39 GMT

Thanks DanaB27.

So the question then is:

For 2019, I believe i have to amend my return and show this excess contribution by adding my 2020 1099-R for the excess contribution amount of 6000. Or should it be a substitute 1099R? And this would not change anything on my 2019 return in terms of numbers, may be except that it would show a non taxable distribution. So what would I send as an amendment? Would this change of showing 6000 excess generate a 5329?

For 2020 how do i get Turbo tax to generate a 5329? It does add this 5 dollars to my taxable income though.

Thanks,

Rajesh

Re: Withdrawing excess contribution for 2019

ThomasM125 — Tue, 09 Mar 2021 22:34:19 GMT

If you have a code "P" in box 7 on the form 1099-R you received in 2020, the description for that entry will say "Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2019." So, I believe the earnings should be reported in 2019 by entering a substitute form 1099-R in the amended return for that year.

The form 5329 will be generated automatically once you make the 1099-R entry.

Re: Withdrawing excess contribution for 2019

goyal_raj — Tue, 09 Mar 2021 23:21:28 GMT

Thanks ThomasM125.

I have code 1P only for the excess contribution of 6k. For the earnings it is code 81 so it would be taxed in 2020. And I do not see any 5329 created for 2020 in Turbo tax.

How do i generate 5329 for 2020?

And for 2019, would i need a 5329?

Thanks,

Re: Withdrawing excess contribution for 2019

goyal_raj — Wed, 10 Mar 2021 03:11:21 GMT

Hi,

Sorry to check again...when i enter form 1099 details in my 2019 return, the code P says "return of contribution taxable in 2019' while my amount is taxable in 2019. How do we get the correct info?

Thanks,

Raj

Re: Withdrawing excess contribution for 2019

goyal_raj — Wed, 10 Mar 2021 03:13:17 GMT

Hi,

Ia m trying to amend my 2019 return by entering form 1099R and when i select Box 7 value as 1P, it says 'Return of contribution taxable in 2018'. How do i get it to show it for 2019?

Thanks,

Re: Withdrawing excess contribution for 2019

DanaB27 — Wed, 10 Mar 2021 13:07:50 GMT

Please select code P and then click continue after you entered all information. On the "Which year on Form 1099-R" screen say that this is a 2020 1099-R.

It still sounds like Vanguard made a mistake with their 1099-R Form since the IRS states:

How to treat withdrawn interest or other income.

You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. (Pub. 590a)

The earnings should be reported in 2019 as well since the excess and earnings were on a 2019 contribution and not in 2020.

Re: Withdrawing excess contribution for 2019

goyal_raj — Wed, 10 Mar 2021 18:36:30 GMT

Hi,

Checked with Vanguard again and after multiple rounds of back and forth with their tax dept they tell me that since the earnings accrued in 2020 (even though the contribution was for 2019) the code shall be 81 only and it is taxable in 2020. If it accrued in 2019 then it would be for 2020. I told them about IRS publication 590A.

What choice do i have now? Go with what VG says or add a substitute 1099R with the earnings on 2019 tax return? And in which year do i send the 5329?

Would IRS be confused if i made the change myself and not match what vanguard says?

Thanks,

Re: Withdrawing excess contribution for 2019

DanaB27 — Wed, 10 Mar 2021 21:40:17 GMT

That is not the correct rule for an IRA but since they do not change the 1099-R enter the earnings on the 2020 tax return with the codes 8 and 1:

Login to your TurboTax Account
Click on "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”

Maybe get Vanguards reasoning in writing from their tax department for your records .

The 1099-R with the code P will be entered in the amended 2019 tax return.