IRA Excess contributions

[WooDog]

This year I overfunded my Personal IRA account.

I am filing jointly, and have contributed $4,500 to a personal IRA throughout the year. I also have a 401k that I have been contributing 10%.

It turns out that my capital gains have put me above the contribution limit. I have $4,060 in nondeductible contributions.

My question is: Can I withdrawal the nondeductible funds from my IRA before filing taxes?

If or how, should I calculate and report the earnings of the $4,060 that were in the IRA of partial year 2021?

Thank You

[DanaB27 · Accepted solution]

To verify, you are talking about a traditional IRA.

Yes, you can request a return of contribution with your financial institute for the amount that was nondeductible or you can leave them in the account and track your basis (nondeductible contributions) on Form 8606.  Your contribution might be nondeductible but you are allowed to make it if you had the taxable compensation. If you had an excess contribution TurboTax will warn you about the penalty. If you only get the screen it is nondeductible then you are allowed to make the contribution. 

Your financial institution should be able to calculate the earnings on the return of the contribution. The earnings will be subject to the 10% early withdrawal penalty if you are under 59 1/2.

If you remove part of the contribution then please correct the amount contributed in the Deduction & Credit section:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"

You will get a 2022 Form 1099-R in 2023 with codes P and 1 (if you are under 59 ½, otherwise it will be P and 7). This 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 2022 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in the 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and 1 
9. Check the IRA/SEP/SIMPLE box
10. Click "Continue"
11. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.

If you are referring to a Roth IRA then please see What happens if I made an excess Roth IRA contribution.

[WooDog]

Thank you very much

[RumHam13]

Would this advice change if it was a Roth IRA instead of a traditional IRA?

[DanaB27]

Yes, it will be a little different.

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of a Roth excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 2022 Form 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 Form 1099-R into the 2022 tax return since the withholdings are reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

@RumHam13

[RumHam13]

Thank you very much!