2023 excess IRA contribution

[settlersbanjo]

My wife and I are married, filing jointly for 2023.  She inadvertently contributed more than the 2023 limit to IRAs.  When we realized this last month (January 2024), we filled out a form with the bank to have the excess $500 removed, and moved into her brokerage account.  With gains accounted, the website shows a 2024 IRA distribution of $526, in addition to 2023 IRA contributions of $4,400 (traditional) and $2,600 (Roth). In other words, the website still shows $500 over-contribution, but also shows the distribution of $526, which is meant to correct that over-contribution.

We're now trying to do our taxes using TurboTax Deluxe.  Here's what we've done, and we're wondering if we did it correctly and what to anticipate in the future:

1. I contributed to a Roth of my own, wife contributed to her own Roth and traditional.

2. Wife contributed $4,400 to a traditional, before 01/01/2024.  It was not recharacterized, and she is not covered by a retirement plan at work. No excess IRA contributions before 2023, no nondeductible contributions to her IRA.  Not a repayment of a retirement distribution.

3. Wife contributed $2,600 to a Roth, before 01/01/2024.  (This made the TurboTax federal refund tracker go down by $30, which makes sense - 6% penalty on $500 excess). It was not recharacterized.  No withdrawals before 2023, no prior conversions, no past excess contributions.  We then entered a Contribution Withdrawn Before the Due Date of $500.  (This made the refund tracker go up by $30, suggesting removal of the 6% excess contribution penalty.)  But should this be $526 including gains instead?

3. I contributed $6,500 to a Roth.  It was not recharacterized, no prior conversions, no past excess contributions.  Not a repayment of a retirement distribution. I am covered by a retirement plan at work.

4. This all results in a screen saying we qualify for an IRA deduction of $4,400.  As far as we understand it, this is correct for married filing jointly given our MAGI and her not being covered by a retirement plan at work - it's the full amount of her traditional IRA contribution.  The Roth contributions have already been taxed, meaning nothing to deduct?  A little fuzzy on understanding this part.

5. Should we be expecting a 1099-R next year, to account for taxes to be paid on that $526?  And what will we do with that on our 2024 taxes? Or is there a way to address that now, to avoid future complications?

Thanks in advance for any insight or clarity!

[ThomasM125 · Accepted solution]

You will get a Form 1099-R in the following year. The best thing to do is to report the excess contribution distribution in 2023 before you file your tax return. Otherwise, you would have to amend your 2023 return when you get the Form 1099-R in 2024.

To enter a refund of excess IRA contributions in the current year follow these steps:

1. Go to the personal income section of TurboTax 
2. Find the Retirement Plans and Social Security menu option
3. Start or Update IRA, 401(k), Pension Plan Withdrawals (1099-R)
4. Choose Add Another 1099-R
5. Choose I'll type it in myself
6. On the screen that says Tell Us Which 1099-R You Have choose I need to prepare a Substitute 1099-R
7. Enter the distribution amount in box 1 of the substitute 1099-R
8. Enter the earnings in box 2(a)
9. Enter code "P" and "J" in box 7
10. When asked about the year on the form 1099-R, say it is for the year following the year you are working on

Follow these additional steps to see if you qualify for removal of the 10% penalty:

1. Click "Continue" after all 1099-R are entered and answer all the questions.
2. Continue until the "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".

[Edited 3/6/24 at 1:28 PM PST] @settlersbanjo

[settlersbanjo]

Hi there,

Thank you for the detailed explanation.  That was very easy to follow, but I just wanted to double check on the years since that looks a little funky. 

For step 9, it says P-Return of contribution taxable in 2022.  Is this just a nuance of us entering the 1099-R ahead of time, since the contribution was actually made in 2023 and the form is expected to come at the end of tax year 2024?

And for step 10, selected 2024 per your guidance:

Thank you so much!

[ThomasM125]

Yes, you are correct. In 2024 the code P on the Form 1099-R will reference 2023 so that is why you enter it now.

[ww_94]

@ThomasM125 I also made a 2021 & 2022 excess Roth IRA contribution. I've amended my federal tax returns (to pay the 6% penalty) but do you know if state tax returns need to be amended? (I'm in CA) I can't find any resources that say state tax returns need to be amended for Excess Roth IRA Contributions.

[settlersbanjo]

Hey there, quick goback.  I just came across this mention of code 8 for excess contributions during the current year, instead of code P for the prior year.  Do you have any thoughts on that?

https://www.taxact.com/support/1210/2023/form-1099-r-excess-401k-contributions?hideLayout=False

From the 2023 1099-R form instructions:

8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2023.

Use Code 8 for an IRA distribution under section 408(d)(4), unless Code P applies. Also, use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless Code P applies. See Corrective Distributions, earlier, and IRA Revocation or Account Closure, earlier, for more information.

P—Excess contributions plus earnings/excess deferrals taxable in 2022.

See the explanation for Code 8. The IRS suggests that anyone using Code P for the refund of an IRA contribution under section 408(d)(4), including excess Roth IRA contributions, advise payees, at the time the distribution is made, that the earnings are taxable in the year in which the contributions were made.

[cityaz]

Made an excess 7500 traditional ira contribution Nov. 2023 for 2023.  Withdrew contribution and $1028 of income April 4,  2024. Am filing my extended return for 2023 how do i report this excess contribution plus income on 2023 return.

[cjn116]

So, was it code 8 or code P?

Thanks. 

[settlersbanjo]

hey, sorry for the super late reply.  This got buried in my inbox until the new tax season rolled around.  In case you're still looking for an answer:

Upon reopening my return, it looks like I used codes P and J as ThomasM125 had suggested.  The IRS and state processed our returns and we haven't seen/heard any red flags since.  Fingers crossed.

I will admit, I never fully understood the suggested selections for options P vs 8, or the guidance to select the following year (2024) for the date on the form.  Or maybe I've just forgotten in the interim, it's been a long year.  My guess is that it was a way to get everything knocked out during last year's tax filing process.  Maybe I can confirm...

@ThomasM125 if you are still out there: I had followed your advice to a T (or rather to a P?), to report the excess contribution for the 2023 tax year.  I expect we will get that 2024 1099-R shortly, showing the excess contribution.  My understanding is that I had filed 2023 as if I was "pre-amending" for this particular 1099-R.  Since I reported the excess contribution already, do I still need to enter that 1099-R this time around?  Or do I ignore it, as the "pre-amending" already settled things with the IRS on that amount?

[ThomasM125]

You do need to report the 2024 1099-R on your 2024 return, as the IRS will have a copy of it and look for the distribution on your return. Because of the codes in box 7 it won't be taxable on your return though.

@settlersbanjo 

[settlersbanjo]

hi @ThomasM125, this thing keeps rearing its head.  Curious if you can advise...

I got through everything in this year's TT and hit a snag at the Smart Check.  The software noted that for Form 5329-S, line 9 shows 0 (excess contributions from line 16 of 2023 Form 5329).  As such, line 12 (2024 distributions for prior year excess contributions) for this year should be blank.  However, that line was filled out with 500.

For what it's worth, the 1099-R's we received:

- one with 500 in box 1, 26.51 in box 2a, 0.00 in box 4, P in box 7, IRA/SEP/SIMPLE checked

- another with 26.51 in box 1, 0.00 in box 2a, 2.65 in box 4, 8 in box 7, IRA/SEP/SIMPLE checked.

I logged both when prompted.

Any ideas?

[DanaB27]

I'm not sure why line 12 had an entry but you can remove it since you did not have an excess contribution from a prior year.

In regards to your Form 1099-R, did you removed the excess from the traditional IRA instead from the Roth IRA? It seemed you said in your original statement you deducted the $4,400 traditional IRA contribution and removed correctly the excess form the Roth IRA.

The Form 1099-R indicate the excess was removed from the traditional IRA. Please check your 2023 Schedule 1 line 20 if you deducted the $4,400. Also, it seems you reported a 2024 Form 1099-R with code P and J on your 2023 return for the return of a Roth excess contribution plus earnings according to ThomasM125 instructions. You might need to amend your 2023 tax return. 

If you indeed requested the excess to be removed from the Roth IRA then you will have to contact your financial institution since they issues the wrong Form 1099-R.

1099-R instructions state: "For the distribution of excess Roth IRA contributions, report the gross distribution in box 1 and only the earnings in box 2a. Enter Code J and Code 8 or P in box 7."

@settlersbanjo 

[settlersbanjo]

hi @DanaB27 ,

I did remove the entry from line 12 and that got me past the error.

As far as the excess that was removed - that was actually removed from the traditional IRA, I just checked the form we filled out for the institution and the transaction histories for the IRA and the account to which the excess was moved.  That also shows us having paid taxes on the excess earnings (likely not the proper term, sorry).  As I understand it, in 2023-early 2024, we made the excess contribution, removed it, paid taxes on the excess earnings, and reported the excess to avoid having to file an amended return this year per the previous advice.

This year, we got those two 1099-R forms from the financial institution, so I entered them into TurboTax.  Removing that value from the aforementioned line 12 is the only other thing I've done that seemed related.  Hopefully that covers us..?

[DanaB27]

To confirm you show the reduced deduction on your 2023 Schedule 1 line 20 since you removed the excess from the traditional IRA.

Yes, the earnings are taxable in 2023 and if you show the earnings on line 4b of your 2023 Form 1040 then you you do not need to amend.

Yes, the Form 1099-R with code 8 showing the taxes withheld will be entered on your 2024 return.  The one with code P you can ignore for 2024 but if you entered it already you don't need to delete it since code P tells TurboTax to ignore the income for 2024.

@settlersbanjo 

[Jama2]

Hello, this has been very helpful as I face a similar situation, thank you! @settlersbanjo When you received the 2024 1099-R, what codes did it have? P and J? Thank you!

* Edit to note that I saw the earlier response, which answered the question. Thank you!