How to handle Roth IRA after exceeding income limit

[bmarshall7735]

In 2022, I started contributing to a Roth IRA. However, due to a change in circumstances (I changed jobs and got a sign on bonus), I exceeded the income limit for 2022. Our MAGI as married filing jointly is $222,537 which is greater than the cutoff of $214,000. I am reviewing my tax documents and my contributions in 2022 were $1000. However, I also withdrew $1975 from the account when I moved apartments, so form 1099-R reflects $1975.00 in box 1 with a distribution code of J in box 7. The correct way to withdraw money would have been to remove excess contributions which would have carried a distribution code of 8 for excess contributions. My question is, do I have to have form 1099-R corrected to reflect code 8 or is it ok to reflect code J only as you can see, I pulled more out than I contributed in 2022?

[DanaB27]

To avoid the 6% excess contribution penalty you will have to withdraw the excess contribution plus earnings by the due date of the 2022 return. This Form 1099-R  with code 8 (if withdrawn in 2022) or code P (if withdrawn in 2023) and code J will have to be reported on your 2022 tax return. And the earnings will be taxable in 2022.

You made a regular distribution and received Form 1099-R with code J. Is the account empty? 

If you removed all earnings then and the account is empty then it would be considered that you removed your excess contribution plus earnings and you can avoid the 6% penalty. Please remember the earnings are taxable in 2022.

[bmarshall7735]

Hi @DanaB27 , thank you for your reply. The account is not completely empty, there is a small amount of money in it, around $200. I checked my yearly statement, and the account has lost $86 in value for FY 2022. In summary, I paid $1000 into the account in FY 2022 and withdrew $1750, and the account lost $86 in value (there was a loss and no earnings). Therefore, I have already removed everything I contributed in 2022 and there are no earnings to worry about. I should therefore not incur a 6% penalty.  Form 1099-R reflects $1975.00 in box 1 with a distribution code of J in box 7, do I need to contact the administrator to have this corrected to reflect code P or is it ok to leave as is?

[DanaB27]

If there were no earnings connected to the $1,000 contribution and you had a loss instead then you should be ok since you removed the contribution. You might want to verify with your custodian that there were in fact no earnings related to the $1,000 contribution. When TurboTax asks about the excess contribution withdrawn by the due date then enter the full $1,000 (without earnings or losses).