Roth, High MAGI, Removal of Excess but with loss of principal

[tocguy]

My TT H&B 2021 doesn't appear to be calculating correctly.

Timeline:

• 10/2021 contributed to Roth IRA
• Filed standard 2021 extension in 04/2022
• Discovered high MAGI issue and performed Removal of Excess prior to 2021 filing deadline in 10/2022
  • Incurred some Loss of Principal of the contribution during the interim

IRS says 2021 filing is not correct.

In TT, the IRA Contribution worksheet line 25 states to "Enter any contribution included in Line 24 (i.e., initial contribution amount) withdrawn before the due date of the tax return. Due to the Loss of Principal the amount is less than the original contribution which TT then interprets as excess contribution remaining on Line 27.

How does one correctly account for the loss of principal?

[dmertz · Accepted solution]

Don't confuse the amount  distributed with the amount of contribution returned.  They are not the same.  The amount of 2021 contribution returned was the amount contributed despite the amount distributed being less that the amount contributed, leaving no excess contribution to be reported on the 2021 Form 5329.

For a proper return of contribution, the 2022 Form 1099-R reporting this distribution should have had codes J and P in box 7, the amount distributed reported box 1 and $0 in box 2a.  Your 2021 tax return was required to include and explanation statement describing that the amount distributed constituted the return of the entire contribution adjusted for investment loss.  Absent that explanation, the IRS has no way to know how much of the contribution was returned.