Excess Roth IRA contributions

[CoachKristine]

@DanaB27 

We only requested regular distribution, no earnings. It is my understanding earnings are only removed if the excess contribution is withdrawn before the due date of the return.  Which was long past. 

[CoachKristine]

@Mike9241 

hmmmm …. I’m pretty sure the earnings stay since I did not withdraw the excess contribution before the due date of the return.  

[DanaB27]

Yes, you are correct. You do not have to remove earnings because you withdrew the 2020 excess after the due date of the 2020 tax return.

“If it is too late to make a corrective distribution, a taxpayer may be able to eliminate an excess contribution simply by making ordinary distributions. For a traditional IRA, the excess contribution is reduced by an amount equal to the portion of an ordinary distribution that is includible in gross income (but not reduced by the return of investment). For a Roth IRA, the excess contribution is reduced by the entire amount of the distribution. In neither case is there a need to distribute the IRA income earned on the excess contribution.” (Correcting excess contributions to IRAs by Vorris J. Blankenship)

@CoachKristine

[CoachKristine]

Ok. Thought so. @Mike9241  had me a little concerned with his comment. 

thanks for verifying!

[CP43]

I am filing my 2021 tax return and i have contributed $7000 in 02/03/2021 and due to MAGI withdraw excess roth contribution of $6000 and earnings of $1401 on 03/24/2022.

Do I need to report my earning in 2021 or 2022? If 2021 what form need to fill out on turbotax?   

[DavidD66]

@CP43 You will report the earnings on your excess contribution on your 2022 tax return.  The IRA Custodian will send you a Form 1099-R with all the information you need to report it.  You will simply enter the 1099-R in TurboTax.

[gkp1000]

Hii MarilynG1

I'm hoping you can help me.

I put 6,000 in a traditional IRA in 2021. I just found out I have no earned income so it is in excess. My bank is in the process of withdrawing the contribution and earnings and it will hopefully happen before the 18. I have not yet filed. I dont think they will generate a 1099-R for me that quickly but they will tell me the earnings and probably other things if I know to ask them after they put it though in a couple of days.

Its my understanding that since I am not claiming a deduction and that I am withdrawing the contribution and earnings, that I only need to pay tax on the earnings as gross income (probably only 0-100$). How do I put the earnings in as gross income?

Also in "deductions and credits", since I will have already withdrawn the contribution and I'm not getting a deduction do I put that I contributed to a 2021 Traditional IRA, 6,000$?

Do I need to I fill out a form 5329 or do I just do a mock 1099-R?

Is it an option to not fill out anything as far as IRA, as long as my bank withdraws it and then wait on the 1099-R ill get nest tax year, I'm not so concerned about the 100 earnings being hit with 10 or 6 percent or losing it all as long as, it doesn't upset the IRS and my withdrawn contribution isint getting hit with any penalties. 

I'm 40 if that matters.

THANK YOU SO MUCH!

[DanaB27]

Yes, you will enter the traditional IRA contribution but enter the excess contribution amount as withdrawn by the due date on the penalty screen.

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Enter the contribution amount without earnings and losses as withdrawn by the due date on the penalty screen

If you withdrew a 2021 excess contribution plus earnings in 2022 before the due date, then you will get a 2022 1099-R in 2023 with codes P and 1. 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 to 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" 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 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.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and click "Continue" since you are under 59 1/2

@gkp1000

[ninnh5]

Hello  - For 2021, I have contributed excess of 6k for my Roth IRA and excess of 6k to my wife's traditional IRA. I filed our 2021 return and completed form 8606 declaring excess nondeductible contribution for my wife's traditional IRA, however forgot to disclose roth IRA excess contribution? 

What actions I need to take to correct my filed 2021 tax return?  What are my options. Can you please provide detailed steps? 

Also, when should I withdraw the excess contributions by? What forms I need to obtain? 

[DanaB27]

You have until Oct 15th, 2022 to withdraw the excess contribution and earnings to avoid the 6% penalty calculated on Form 5329. You will need to request the withdrawal of excess contribution plus earnings.

"If you timely filed your 2021 tax return without withdrawing a contribution that you made in 2021, you can still have the contribution returned to you within 6 months of the due date of your 2021 tax return, excluding extensions." (IRS)

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of the excess Roth 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.

For your wife's withdrawal of the excess traditional IRA contribution and earnings, you will get a 2022 Form 1099-R in 2023 with codes P and 1.

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 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.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. 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")

@ninnh5

[ninnh5]

@DanaB27 thank you for prompt response. I appreciate it. So technically I have to amend my 2021 tax return with Roth and Traditional excess funds are withdrawn. Is that correct understanding? 

[DanaB27]

Yes, you will have to amend your 2021 return to report the withdrawal. Also, make sure you indicate on the penalty screen during the IRA contribution interview that you are withdrawing the excess contribution by the due date. Then TurboTax will not calculate the 6% excess contribution penalty.

@ninnh5

[ninnh5]

@DanaB27 thank you again, you're tremendous help. 

One last question, do i need to care for net income/loss as I am withdrawing before the tax filing deadline (including extension)?  or I have to only withdraw 6k? 

[DanaB27]

Yes, you will have to remove the excess plus any earnings to avoid the 6% penalty. If you had a loss then the distribution will be less than the contribution but you will still enter the full excess contribution amount as withdrawn on the penalty screen .

@ninnh5

[AL107]

HI @DavidD66 ,

Just trying to follow up on @CP43 situation as mine is very similar - after filing my return I realized that I have over contributed to Roth IRA due to MAGI, but still within deadline to remove the excess and earnings before Oct 15 based on the IRS Publication 590-A (for 2021 Returns). In chapter 2, page 42, IRS mentions that "The earnings are considered earned and received in the year the excess contribution was made."

So, I was wondering if I'm reading this wrong or this passage relates to something else in the publication, but it seems if the excess was made in 2021 than the earnings are as of 2021 as well. I guess this may be a reason for amended return as those excess earnings were not reported on initial 1040 for 2021. Am I getting it right?

Really appreciate your help!

Here is the full excerpt: 

"Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made."