How to fix the mistake of removing the excess contribution

[Lilin]

In 2022, I contributed $6,000 to my Roth IRA, which I recharacterized to a traditional IRA in March 2023. The recharacterized amount, including earnings, was $8,400. Initially, I believed that I had over-contributed to my traditional IRA since the total amount exceeded the $6,000 annual limit. Consequently, I withdrew the excess $2,400, which resulted in taxes and penalties on the earnings. Now, I have two questions regarding this matter:

1. Should I fill out $6000(contribution) or $8400(contribution plus earnings)  when asked about the "Amount switched from a Roth IRA to Traditional IRA"? Did I make an excess contribution to my traditional IRA after recharacterization?
2. If it turns out that the recharacterization did not result in an over-contribution to my traditional IRA, how can I fix the mistake of removing the excess contribution?

I have been struggling with these questions for some time. I would really appreciate any help in resolving this matter as the deadline of tax filing  approaches.

[dmertz]

Regarding question #1, no, you did not make an excess contribution.  You recharacterized $6,000, not $8,400.

Regarding the $2,400 you withdrew, did you request a return of contribution (resulting in a gain/loss-adjusted amount being distributed or did you request a regular distribution?

If you requested a return of contribution of $2,400, it seems like somewhere around $3,360 would have been distributed to you, including $960 of gains that would be taxable.  In that case you have contributed a net amount for 2022 of $6,000 - $2,400 = $3,600 and you have until April 18, 2023 to contribute a new $2,400 to make your contribution for 2022 be a full $6,000.

If you requested a regular distribution of $2,400 and you received $2,400, you have a distribution that is eligible for rollover provided that it would not result in a violation of the one rollover-per-12-months limitation.

[DanaB27 · Accepted solution]

1. You will enter the contribution amount as recharacterized ($6,000) on the "Amount switched from a Roth IRA to Traditional IRA" screen. No, you didn't make an excess contribution.

You will enter the recharacterization when you enter the contribution to the Roth IRA: 

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"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

2. You withdrew part of your contribution and earnings and this cannot be undone. The earnings will be taxable on your 2022 tax return. You have until April 18th to make additional IRA contributions if you wish the max out your IRA contribution limit (make a new contribution for the amount of contribution that you removed).

You will get a 2023 Form 1099-R in 2024 with codes P and 1. This Form 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 withholding is reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholding 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 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 2023 1099-R.

[Lilin]

Thank you for explaining. 

To clarify, I recharacterized $6,000 contribution along with $2,400 earnings from my Roth IRA to a traditional IRA. After realizing that this exceeded the contribution limit, I requested a return of contribution of $2,400 from the traditional IRA to avoid excess contribution. If I had not requested the return, I could have converted the entire $8,400 back to the Roth IRA. My question is, is it possible to reverse the return of contribution of $2,400, so that it appears as if the return of contribution never happened?

[Lilin]

Thank you for providing me with guidance!

I have a few questions that I hope you can help me with.

1. Should I use a substitute Form 1099-R(Form 4852) since the actual Form 1099-R for the removal won't be available until next year?
2. I removed $2400 earnings from the $8,400 total, which included a $6,000 contribution and $2,400 earnings. Should I enter $2,400 in both Box 1 and Box 2 of the 1099-R form?
3. In the interview, there is a question that asks, "Let's see if we can reduce your early withdrawal penalty." Since I should not have requested a return of contribution, should I select "Incorrect Early Distribution"? If I choose this option, I can avoid 10% penalty for early distribution.

[dmertz]

@Lilin , it's still not clear what kind of distribution you received.  If the amount you received was $2,400, it seems that it was a regular distribution, not a return of contribution.  If it was a regular distribution, because the distribution was received within the last 30 days or so, you still are within the 60-day period in which you can roll the distribution back into the traditional IRA provided that you rolled over no other similar distribution from a traditional or Roth IRA within the one-year period ending on the date of the distribution from the traditional IRA in March 2023.

If you are unsure of the type of distribution you received, contact the financial institution to find out what type it was.  As I said previously, had you actually requested a return of $2,400 of your contribution for 2022, an amount somewhere around $3,360 should have been paid to you.

Don't do anything before determining the type of distribution you received, but do find that out before April 18, 2023 so that you can know your options to get money back into the traditional IRA.  The questions you have asked imply that you may be jumping the gun a bit.

[Lilin]

I am sorry for any confusion earlier. To clarify, the actions I took were as follows:

1. Contributed $6,000 to a Roth IRA in 2022.
2. Recharacterized the $6,000 contribution and $2,400 earnings from my Roth IRA to a traditional IRA in March 2023 because I was not eligible for a Roth IRA.
3. After the recharacterization, my traditional IRA had a balance of $8,400, which made me think that I had over-contributed. So I filled out a removal-excess-form to remove the excess contribution of $2,400 for 2022 from my traditional IRA in one or two days after the recharacterization,, and received $2,400 . This was not a regular distribution, but rather a return of contribution.

Now, I understand that I did not over-contribute to the traditional IRA because of the recharacterization. If I do not reverse the return of contribution, I will be able to convert the entire $8,400 from my traditional IRA back to my Roth IRA. 

My question is: 

 Can I undo the return of contribution, effectively reversing it as if it never happened?

Thank you for your help!

[dmertz]

"So I filled out a removal-excess-form to remove the excess contribution of $2,400 for 2022 from my traditional IRA in one or two days after the recharacterization,, and received $2,400."

It seems that the financial institution miscalculated the attributable gain.  The gain or loss should have included the gain while the $6,000 contribution was in the Roth IRA.  Given the short time between the recharacterization and the return of contribution, the return of the $2,400 of contribution should have included about $960 of gains.  (The start of the computation period for the gains should be the date of the original Roth IRA contribution because the recharacterization treats the original Roth IRA contribution as having been a traditional IRA contribution on that date.)  It will be difficult to provide an appropriate explanation of the return of contribution if the gain was not calculated correctly.  I would try to confirm with the financial institution the details (particularly boxes 2a, the marking of either of the boxes in box 2b and the code in box 7) of the 2023 Form 1099-R that you'll be receiving in early 2024.

If one treats the distribution of $2,400 as satisfying a return of $2,400 of contribution (which I disagree with because I believe that the attributable gain was not correctly calculated), it means that you have only contributed $3,600 to a traditional IRA for 2022.  TurboTax does not have a good way to deal the complexity of a return of contribution from a recharacterized contribution, you might need to just enter the resulting $3,600 traditional IRA contribution instead of entering the original Roth IRA contribution, indicating that you switch the contribution to Roth , then indicating that you received a return of a portion of the contribution.

[Lilin]

To recharacterize,I transferred $8400 ($6,000 contribution plus $2,400 earnings) from my Roth IRA to a traditional IRA in March 2023. However, within two days, I realized that $2,400 was an excess contribution and promptly removed it from the traditional IRA, leaving a balance of $6,000.

Now, I am seeking advice on how to cancel the impact of the excess removal. One option that I am considering is to recontribute the $2,400 to the traditional IRA. However, I am unsure if this is a good approach or if there are other methods available to me. Any guidance or suggestions on how to proceed would be greatly appreciated.

[DanaB27 · Accepted solution]

There are no other methods available to you. But before you make the contribution you should check with your financial institution why they didn't include any earnings when they returned part of the contribution. I agree with dmertz that if you requested the return of contribution then this should have included the earnings. Please confirm (as dmertz stated) with your financial institution the details (particularly boxes 2a, the marking of either of the boxes in box 2b, and the code in box 7) of the 2023 Form 1099-R that you'll be receiving in 2024.

If this is indeed the return of the contribution plus earnings then you would be able to able to make another IRA contribution but if you receive a 2023 Form 1099-R showing this as a regular distribution without earnings then you cannot make another contribution because in this case, you didn't get a return of the contribution and already contributed the maximum of $6,000 for 2022. 

@Lilin 

[Lilin]

Thank you for providing clarification!

I have verified with my custodian that the distribution is the return of contribution. The excess removal from the traditional IRA occurred shortly after I recharacterized from the Roth IRA to the traditional IRA. Therefore, there was no earnings generated.

I do have a question:

Should use a substitute Form 1099-R (Form 4852) since the actual Form 1099-R for the removal won't be available until next year? I have heard that filing a substitute form might increase the probability of an IRS audit.

[DaveF1006]

You can use the substitute from this year to report the removal of the excess contribution or wait until next year. This seems to be a widely used practice and should not necessarily cause an audit unless the 4852 form is filled out incorrectly.  if you do this, make sure you get all of the information correct on the form including EIN and address. 

[Lilin]

Now I know what to do. Thank you for taking the time to explain everything to me, I really appreciate it.

[Lilin]

I appreciate you taking the time to help me understand. I have learned a lot from you. Now I know what to do. Thank you very much!