Excess Roth IRA contributions

[mikeshaw247]

Hi Dana -

I have a similar question.  I made an excess ROTH contribution in 2021 (not enough earned income) of $7,000.  Doing my taxes in Turbotax in Dec of  2021, Turbotax alerted me to this.  I removed the $7,000, plus the profit made before the end of the year 2021.  I did this by filling out an excess contribution form provided by Merrill (my broker) documenting all that.  I did not report any Roth contribution on my 2021 tax return using Turbotax. Turbotax didn't seem to ask for the details of the excess contribution and the reversal.  So, in my mind, it never happened once I took the money out again.  Come May of 2022, I get a  5498 from Merrill showing I made a $7,000 Roth contribution for 2021. 

Do I need to do anything to let the IRS know that I did take the money back out in 2021?

Thanks!

[1597980]

I found out my 2022 contribution to Roth IRA was excess contribution due to a sale of rental property that generated large capital gains.  I spoke to my plan administrator about re-characterizing the contribution as traditional IRA contribution.  However, because this contribution is after tax money (TurboTax tells me I'm eligible to make this contribution to traditional IRA but not tax deductible) while the rest of my current (Roll-over) IRA is pre-tax money, this will complicate things down the road when I start taking distributions.  I looked into applying the contribution to 2023 Roth but it looks like I would still pay the penalty and if I don't have earned income in 2023, I would not be eligible to make Roth contribution at all.  So my best option seems to be withdrawing the entire amount of contribution and pay tax on the earnings, if any.  Am I correct?  If I choose this option, how do I handle it on my 2022 tax return?  Do I show no contribution at all for 2022? I don't see an option for entering the contribution and then withdrawing it (only option is to re-characterize it).  Additionally, shall I be getting a corrected Form 5498 plus a 1099-R from my plan administrator? 

Thank you!

[AbrahamT]

See HERE  under " JD caseras129 and Dianne C958" for the complete detail in how to handle an excess contribution withdrawn before the filing due date. You would have to enter a 1099R as if you already received it. As far as the earnings to report, you would need to call your plan administrator for that info and report it as taxable earnings on Box 2a on the 1099R input as well as about getting the corrected Form 5498 from them as well which will now not show the IRA contribution amount. 

[1597980]

Thanks.  Reading the thread you sent confuses me as each scenario is different.  Just to clarify: I'm withdrawing the entire excess contribution now before tax deadline, my plan administrator said they will issue an earnings letter (if any) in a few days but the 1099R will be issued for 2023. My understanding so far is that I report the earnings and pay tax on them on my 2022 return using Form 8606 and treat the earnings as a distribution from my Roth IRA. Is this correct? If so, I'm probably better off not asking my plan administrator to withhold tax since (I assume) TurboTax will calculate the tax due once I entered the information? If there is a loss on the excess contribution, do I also need to use this form to report loss?  I understand my plan administrator will reduce the withdrawal amount by the loss.  Also, since I'll be reporting the gain on my 2022 return, I don't report anything when I receive my 2023 1099R from my plan administrator for next year?  

Form 5329 instruction says if I withdraw the excess contribution and pay tax on earnings prior to tax deadline, then the excess contribution will be treated as not having been made.  Do I then still need to file a Form 5329?  Do I fill out my 2022 Roth IRA contribution as 0?  I think someone mentioned my plan administrator will issue a corrected Form 5498 for 2022 showing no contribution? 

All of these seem so confusing.  Thank you again. 

[ThomasM125]

You don't need to file form 5329 if you make the withdrawal by the due date of your tax return, as you won't have an excess contribution. Since you don't have any earnings, you won't have to pay any tax or penalty. You should enter a substitute form 1099-R on your 2022 tax return to report the distribution that will be reported on your 2023 1099-R that you will receive in 2024. You make the following entry for a substitute Form 1099-R on your 2022 tax return. on your 2023 tax return, you will enter the Form 1099-R that you receive reporting the distribution, but it won't show as taxable on the return.

1. Choose the Federal option on your left menu bar
2. Choose Wages & Income
3. Choose the Retirement Plans and Social Security menu option 
4. Choose IRA, 401(k), Pension Plan Withdrawals(1099-R)
5. Choose the enter 1099-R option
6. Choose Change how I enter my form
7. Choose Type it in myself
8. Choose Financial institution or other provider (1099-R)
9. Enter in as much information as you can regarding the pension income 
10. Work through that section until you see Do any of these situations apply to you?
11. Choose I need to file a substitute 1099-R
12. Complete the information requested

Enter the distribution in box 1 and use code "8" in box 7.

[1597980]

Thanks. This makes things much clearer to me now. My account custodian has withdrawn the excess contribution. I actually had a loss. Since I won't have a 1099R until next year, I wanted to confirm that I'm filling out the substitute 1099R correctly. My excess contribution is $7,000, the withdrawal amount is $6820 because I had a loss of $180. For box 1, I entered $6820; box 2a taxable amount – 0; box 2b, I checked “total distribution”; box 7 – code 8 “return of contribution taxable in 2022”; Do I check the box “IRA/SEP/SIMPLE” next to box 7? Where do I enter the loss of $180? box 3 is for capital gain, but negative number is not allowed.

At the end, TurboTax asked me if I want to fill out a Form 4852 for funds received in 2022. Since I received the withdrawal in 2023, I don't need to fill out this form?

Is the Substitute 1099R the only form I need to fill out? Also, am I correct that I do not need to complete the “IRA contributions” under “Deductions and Credits” (even though my custodian has previously issued a Form 5498 showing the contribution and won't be issuing a corrected one)?

Finally, I have a separate but related question: I transferred 401K to a rollover IRA in 2022 while I was a NJ resident in 2022. I moved to FL in December 2022. How do I answer the question: did you receive this 1099R while you were living in one of the following states? Since the question is about residency when I received 1099R, not when I did the rollover, I should say FL?

Thank you very much!

[ninnh5]

Here is my situation and any insights is helpful. 

My wife and I filed 2021 tax returns and realized that we are not eligible to contribute to IRA accounts. However, prior to this realization we contributed 6K to my wife's traditional IRA account and 6K to my roth IRA account. As soon as realized we submitted return of excess from our brokerages. 

my wife's traditional IRA Return of excess 1099R was issued in 2022 - which has gross distribution of $5797.59 in Box 1. We contributed 6K originally. How do we report this? i showed 1099R in 2022 returns however, do i need to amend 2021 tax returns? 

For my roth IRA, i contributed 6k submitted ROE, received 1099R. Box 1 shows 6626.86 and Box 2a shows $626.86. How do i report this to IRS? I showed 1099R in 2022 returns, but do i need to report or amend 2021 tax returns? 

Please advise, how do I handle this? 

[DanaB27]

Yes, you will have to amend your 2021 tax return to report your 2022 Form 1099-Rs. Only the earnings shown in box 2a are taxable and subject to the 10% early withdrawal penalty if you are under 59 1/2.

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Enter Form 1099-R and click "Continue"
5. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
6. Click "Add another Form 1099-R" to add the second Form 1099-R
7. Enter Form 1099-R and click "Continue"
8. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
9. Click "Continue" after all 1099-R are entered and answer all the questions.
10. 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" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

You don't enter the 2022 Form 1099-Rs with code P on your 2022 tax return unless you had tax withholdings. Then you have to enter it to get the taxes applied to 2022, TurboTax knows to ignore the distribution because of the code P.

[ninnh5]

thank you so much @DanaB27 

So technically i need to amend the 2021 return for the amount shown in Box 2a, rest i am good. do i have the correct understanding? 

[DanaB27]

Yes, you will enter both Form 1099-Rs since you are amending the return but only the earnings listed in box 2a will be taxable.

@ninnh5 

[ninnh5]

Thanks @DanaB27 while ammending federal it seems straightforward, however NJ state return amended form on TT shows i have total taxable pensions, annuities and IRA distributions/withdrawl of $12,425k in 2021. Shouldn't that amount be only limited to $626? 

[DanaB27]

Yes, only the $626 should be taxable. Please go through the NJ state interview to enter the amount that was previously taxed by NJ.

@ninnh5 

[ninnh5]

thank you so much for all your assistance. one final question @DanaB27 when I sent my amended return, do i need to print all schedules and all forms or only print and submit the schedule or forms impacting the change with 1040x? 

[DanaB27]

No, you don’t need to print everything, you only need to send the Forms and Schedules that changed.

@ninnh5