Ira roth excess contribution withdraw.

[Felidan]

Hello, 

I have contributed $7000 to my Roth IRA for 2022 last April and I discovered that I do not qualify for any contribution because I'm over the income threshold. Also, in March 2022 I have contributed for the tax year 2021. I know I have to withdraw the entire contribution for 2022 tax year and earnings/loses to avoid tax penalties, but I do not know how much of the balance accounts for 2022 and how much for 2021. Other words, what is the total amount I have to withdraw? I know the account balance incurred a loss but how much of that is attributable to only the $7000 I have overcontributed for 2022 tax year? 

I should say that the financial institution where I have my IRA Roth brokerage account could not give me this information. 

[MichaelG81]

You have to withdraw your total excess of course as you stated plus earnings; but if no earnings or if you have losses you must still take out the original basis of your contribution minus your loss. So, if you contributed say 5,000 excess and incurred and 2,000 loss, the amount you take out will of course be less than your contribution amount.

Remember, you could also absorb the over contribution in what they call absorption over time. Basically, the amount you over contributed last year can be absorbed into next years Roth IRA if you have not put any other basis into it for the year. It can absorb up to 6,000 or 7,000 with catch up contributions, and once fully absorbed no more penalties for excess contributions.

You can look for Form 5329 in 2021 that will report your excess contribution.

@Felidan 

[Felidan]

The problem that I encounter is figuring out what is the amount I need to withdraw. I know the principal amount overcontributed is 7K but how do I figure out the associated loss or earning for that? 

Is there a formula that can be used to calculate the earnings or loss just for the amount overcontributed?

The brokerage account will send out a form 5498 but only after April 15 and that is too late. 

[DavidD66]

You should be able to determine the investment performance of the investment you made with the $7,000 in April of 2022.  If you bought a mutual fund(s) you can get the price paid from your online account information, and then calculate the gain/loss based on current price(s).  You will have to account for dividend and capital gain reinvestment, if applicable.  The amount of the loss you come up with is not going to be significant, and it's not going to be challenged, so make a good faith effort and go with it.   

[Felidan]

Thank you @DavidD66 for your response. 

The contribution was invested in more than one fund and few ETFs and also was invested along with the cash contribution for 2021 tax year that I do not have to withdraw. I have read about Net income attributable (NIA) and a formula to calculate it using the formula:

Net Income Attributable = Excess Contribution x [ (Adjusted Closing Balance – Adjusted Opening Balance) / Adjusted Opening Balance ]

Is this something that the IRS is considering acceptable?

[DanaB27]

Yes, the formula is acceptable to use to calculate the earnings on your 2022 excess contribution (26 CFR § 1.408-11). But generally, your financial Institute will calculate the earnings for you when you request the removal of excess contribution for 2022 plus earnings.  

To remove the excess contribution for 2021 you only will request a regular distribution in the amount of the excess contribution (without earnings or losses) since it is after the due date of the 2021 return. You will have to pay the 6% penalty for 2021 and 2022 on the 2021 excess on Form 5329 part IV. For 2021 entering the Roth IRA contribution should have created Form 5329 automatically. For 2022 please follow these steps:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter your Roth contribution for 2022
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2021 (if it wasn't carried over).
7. On the Penalty screen enter the 2022 excess contribution amount as removed (TurboTax will calculate the 6% penalty on the 2021 excess amount)

 You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of 2022 excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 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 2022?"
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 2023 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 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

Next year on your 2023 tax return you will enter the Form 1099-R with code J for the regular distribution of the 2021 excess:

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2023 (include the 2021 excess in this amount but not the removed 2022 excess) on the "Enter Prior Year Roth IRA Contributions" screen
6. Answer the remaining question.

@Felidan 

[Felidan]

Is the recharacterization of the $7000 contribution from a Roth IRA to a traditional IRA an option to avoid the 6% penalties for overcontributing?

[SharonD007]

Yes, you can recharacterize the Roth IRA to a traditional IRA by April 18, 2023 (October 15th if you file an extension) to avoid the 6% penalty for an excess contribution.

Follow the steps below To re-characterize your Roth contribution in TurboTax, follow these steps:

1. Sign into your TurboTax account
2. Open (continue) your return
3. In the search bar, type IRA contributions
4. Select the Jump to link in the search results
5. Select Roth IRA and Continue
6. Answer Yes on the screen, Did you make a Roth IRA contribution for 2022? 
7. Answer No on the screen, Is This a Repayment of a Retirement Distribution? 
8. On the next screen, enter your Roth contribution amount
9. Answer Yes on the screen, Switch from a Roth To Traditional IRA?
10. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses)
11. On the screen, Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were re-characterized.
12. If you would like guidance for this section, select Fill in Template

For more information, please review the TurboTax Help articles How do I re-characterize a Roth IRA contribution as a traditional IRA contribution in TurboTax? and What's the difference between a conversion and a recharacterization?