Withdraw Excess Roth Contribution Question 2

[martymoose]

Contribution made in error 2020. (100% excess)

Rounding off numbers for simplicity.  

Contributed $7000 on May 13, 2020 for tax year 2020.  Withdrew $7000 plus earnings of $3000 = $10000 on April 20, 2021.  $3000 taxable.  [tax day extended to May 17 for 2021]

While entering answers to TT questions, showed I would owe EXTRA TAX BILL of $300 (10%).  Is this a penalty?  I thought I was withdrawing in time to avoid a penalty.  At completion-I owe $300 + $700 federal + $125 state = $1125 tax on $3000.  A 38% tax!  Brutal!  Does this sound correct?  Age over 60, Roth held for 2 years.

[MinhT1]

This is only partially correct.

As your Roth account is less than 5 years old, your withdrawal of earnings is subject to Federal and state taxation. However, as for the penalty of 10%, please check your DOB in the Personal Info section of TurboTax and please let me know: on your form 1099-R for the withdrawal, what code is in box 7?

You have also avoided the excise tax of 6% on the excess contribution as you withdrew before May 17, 2021.

@martymoose   I have again edited my answer.

[Edited 01/27/22 |  1:11PM PST]

[martymoose]

Box 7 codes are:  J, P

[FangxiaL]

Here is what you DO need to do and what you DO NOT do with your 2021 Form 1099-R due to excess Roth IRA distribution:

• You DO need to go back and amend your 2020 to report the earnings because the earnings are included in the taxable income for the year the excess contribution was made (2020). You only pay tax and penalty on the $3,000 earnings. Let TurboTax program know that it is 2021 Form 1099-R.

• You Do NOT file the 1099-R form with your 2021 taxes unless there are federal and/or state taxes withheld. Taxes withheld will lower your 2021 tax liability or increase your refund. 

For more information, see Option 2 in this help article.

For help with amending your 2020 return, click here.

@martymoose