Unwanted Traditional IRA contribution

[AlexVr]

Hi, I'm over 59 1/2. My wife and I do $14k contributions in beginning of a tax year, so we did for 2021.

Me in to Roth, she in to Traditional. By the end of the year we found that our AGI is above $208K, very surprising good news! But I needed to remove my $7k contribution from Roth IRA as excess cont., And $7k contribution for my wife in to Traditional IRA is non deductible.

The question: If we take this $7k Traditional IRA contribution back from IRA account, how to report it in Turbo Tax for 2021 that it was withdrawn?

Thank you

Alex V.

[DanaB27 · Accepted solution]

If you plan to withdraw the nondeductible traditional IRA contribution then you will delete it from the IRA contribution section to avoid creating Form 8606:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Deselect “traditional IRA”
4. Confirm deletion

You will need to request the withdrawal of excess Roth contributions and earnings with your financial institute by the due date. Please enter on  the penalty screen that you withdrew the excess contribution by the due date.

Next year you will get 2022 Forms 1099-R for the distribution only the earnings will be taxable. The earnings will be taxable on your 2021 return. These 1099-Rs will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 1099-R  2022 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 in 2022 tax return but the withholding will be applied to 2022.

For the Roth IRA 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 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 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")

For the traditional IRA:

1. Click on the "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Answer "Yes" to "Did you get a 1099-R in 2021?"
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2a enter the earnings
7. Box 7 enter 1 and P
8. Click "Continue"
9. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
10. Click "Continue" after all 1099-R are entered and answer all the questions.
11. 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")

[AlexVr]

Hi, DanaB,

Reading directions for Roth IRA, you mentioned to Enter "P" in the Box 7 of the 1099-R.

This will indicate Return of contribution taxable in 2020. But the contribution was made in 2021 for Tax year 2021 and withdrawn in Mar 2022?

Also for Box 1 - it is $7000. What is the Taxable amount? I'd think $0 as money were contributed and withdrawn for the same Tax year?

Thank you.

[DanaB27]

Yes, the P-code on a 2022 Form 1099-R will mean "Return of contribution taxable in 2021". Yes, 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.

Box 1 will be $7,000 plus any earnings you had. If you had a loss it will be $7,000 minus the loss. The taxable amount in box 2a should be the earnings. If you didn’t have any earnings or had a loss then box 2a will be $0.

 @AlexVr

[AlexVr]

Yes, both contributions (Roth and Traditional) were removed this month, with some Loses.

I did mark Box 7 with J and P, answered followup questions verifying that distribution is taxable in 2021. 

The Turbo Tax final screen says that I may need to Amend my 2020 Return because earning were made in 2020. Which is confusing because as it was indicated above we working on tax year 2021?

[DanaB27]

You need to select that it is a 2022 Form 1099-R in the follow-up screen because you are getting this Form for the 2022 tax year. Please see step 9 in the instructions for the traditional or step 10 in the instruction for the Roth: “On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.”

@ AlexVr

[AlexVr]

DanaB, Thank you!