excess roth contribution

[chasfiii]

I have seen questions similar to this, but I have additional questions.  I made an excess Roth contribution for 2020 in March 2021 based on my 2020 stated W2 earnings.  I didn't catch the excess error until I was filing my 2021 return. Some of my earnings were from deferred income and were not so designation on my 2020 return. (I just figured this out). I could not determine how to amend my 2020 return (couldn't determine how to enter info in turbotax) so I filed my 2021 taxes,  completed form 5329 and paid the 6% penalty for 2021.  I removed the excess contribution in March 2022 prior to filing my 2021 taxes. I just received a 1099R for 2022 showing the removal of the excess contribution and the earnings.  If I report this form for on my 2022 taxes, I turbotax shows the 6% penatly, but it doesn't look like turbotax in adding taxes for the earnings.

My current solution appears to be......file an amended 2020 return modifying my 2020 earning to subtract the "differed income" This creates a form 5329 for 2020 and shows the 6% penalty.   Then amend the 2021 return utilizing the form 5329 from 2021.  The question then becomes how do I utilize the 1099R for 2022. Is that info entered on the 2021 amended return? Do I then disregard the form on my 2022 taxes? 

[DanaB27]

Yes, you will have to pay the 6% penalty for 2020 and for 2021 because you didn't remove the 2020 excess contribution to the Roth IRA until 2022. Since it was after the extended due date of the 2020 tax return you should have requested a regular distribution (without earnings) and received Form 1099-R with code J. Entering a Form 1099-R with code J on your 2022 tax return would remove the excess carried over from prior years on Form 5329.

It seems you got Form 1099-R with codes P and J? This would indicate that you got a contribution for 2021 plus earnings returned in 2022. And this would belong on your 2021 return. You might want to check with your financial institution if they will correct the form. Or you can file a substitute Form 1099-R with code J only and enter it on your 2022 tax return.

To file a substitute Form 1099-R:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R” 
4. Select "Change how I enter my form" on the "Let's import your tax info" screen
5. Select "Type it myself"
6. Fill out Form 1099-R and use code J  in box 7 only
7. Continue through the questions until the "Do any of these situations apply to you?" screen select "I need to file a substitute 1099-R"
8. Continue through the question
9. Click "Continue" on the "Review your 1099-R info" screen
10. Answer all the questions and make sure you enter the net contributions prior to 2022 (include the 2020 excess contribution) on the "Enter Prior Year Roth IRA Contributions" screen
11. Answer the remaining question.

[chasfiii]

Am I correct that I need to start by amending my 2020 return? It took me awhile to figure our why turbotax kept saying I was eligible to contribute.  Turns out the W2 for deferred income was being counted as "earned income."  The only way I see to fix this is to reclassify the deferred income. That generates a form 5329 for 2020. I can then amend my 2021 return to correct the 2021 form 5329. 

[DanaB27]

Yes, you will need to amend your 2020 and 2021 tax returns to add the 6% penalty. Please see How do I amend my federal tax return for a prior year?

To confirm, you didn't have any taxable compensation in 2020 and that is why you couldn't make the IRA contribution.

[chasfiii]

I have a few more questions. Here is where I stand. I amended my 2020 and my 2021 returns to reflect the actual excess Roth contribution and paid the 6% additional tax for both years. . The actual excess was $4000.  I had $1000 in qualified earnings in 2020 and I made a $5000 contribution to my Roth IRA.   In 2022 I realized I had included non qualified income in my contribution and I thought the amount of the excess contribution was $5000 so in early 2022 I took a $5000 distribution (excess contribution). The next month, I calculated the earnings on the excess contribution and took a $200 distribution. These amounts were included on my  2022 1099-R with $5200 (gross distribution) in box 1 and $200 (taxable amount) in box 2a. The distribution codes are J &P.   If I file a substitute 1099R using only the code J, do I enter amounts in boxes 1 and 2a? Box 1 being the total distribution and 2a being the amount of the earnings?  

[DanaB27]

If you file a substitute Form 1099-R with code J only then you will enter the distribution amount in box 1 and check the “Taxable amount not determined” box in box 2b. In the follow-up questions, you will be asked for the net contributions prior to 2022 and you will include the $5,000 contributed for 2020. You only will have a taxable event if you withdrew more than your total net contributions to the Roth IRA.

[chasfiii]

I appreciate your help, but I'm still confused.  I made two withdrawals from my Roth IRA to correct the 2020 excess contribution.  The first withdrawal was for the excess contribution.  the second withdrawal was for the amount I calculated as being the earnings. Both withdrawals were made in 2022. The gross distribution and the earnings are reported on my 1099R.  The amount in box 1 shows the gross distribution.  The amount in box 2a is the earnings which I think are taxable.  The 1099R information is being entered in TurboTax, but there doesn't seem to be any change in the taxes due.  Where do the earnings need to be reported in order for them to be taxed?

[DanaB27]

If you file the substitute Form 1099-R with code J then you will enter this as a regular distribution since you removed the excess after the 2020 due date. You were not required to remove earnings since you removed the excess after the due date of the 2020 return.

You will enter the gross distribution (excess plus earnings) in box 1 and check the “Taxable amount not determined” box in box 2b. This will only be taxable if you removed more than your total net contributions prior to 2022. If you have contributions left in the Roth IRA/ remove only contributions then this isn't taxable. Only if you remove more than your prior net contributions then you are removing earnings and it will be taxable if you are under 59 1/2.

[chasfiii]

I have another curve. I'm confused as to what amount goes in blocks 1 and 2a if I do a substitute 1099-R.  I am meeting with my Roth provider on Monday to see about getting a corrected 1099-R rather than trying to do a substitue1099-R.  Just for clarification, I am 75 years old and I would like to know what I am asking them to do. What codes to use etc.    I made a $5000 contribution to my  2020 Roth IRA before filing my 2021 taxes. In  early 2022 before I determined I had excess contributions and where and how the error was occuring, I took a $5000 distribution thinking that the entire $5000 was excess.  I also took a $200 distribution for earnings on the excess contribution. As I was amending my 2020 return last week, I found the actual excess contribution in 2020 was $3890.  I have amended my 2020 and 2021 returns  to show the $3890 and have paid the 6% penalty for both years. The 1099-R for 2022 shows the gross distribution amount to be $5200 in block 1. Block 2a shows $200 as taxable.  The codes J&P are being used for the current 1099-R.

Since I had a total of $5200 distributed , with $3890 being the actual excess distribution and $200 being the earnings on the excess distribution, how do I report the additional $1110 distribution?   What codes would be used? Is it possible to get a corrected 2022 1099-R that can be filed with my 2022 taxes? On my current 2022 return the $5200 gross distribution is showing on line 20 of section IV, thus no penalty 6% for 2022.   Long story short, is it possible to get a corrected 1099-R that covers this situation, amounts, codes, etc ?  

[DanaB27]

Yes, it would be best to try to get a corrected Form 1099-R if possible. You can tell your financial institution that the two distributions ($5,000 and $200) were removed after the due date of the 2020 return and therefore are just regular distributions and not returns of excess contributions and earnings (with code P and J). Excess contributions and earnings can only be returned with the P and J code until the extended due date of the tax return, after that date the excess can only be removed with a regular distribution (without earnings and losses).

 Since you are over 59 ½ your code in box 7 on Form 1099-R for a regular distribution would be Q (assuming you had the Roth IRA for more than 5 years, otherwise it would be T). Enter the gross distribution ($5,200) in box 1 but leave box 2a blank. Check the “Taxable amount not determined” box in box 2b.

@chasfiii