1099R form for Excessive Roth IRA Contribution

[jz2000]

I made $7000 Roth contribution on 4/10/2020 to my Roth IRA for the year of 2019 when I filed the turbotax 2019 return. Then I realized that I did not qualified for the contribution since I have no earned income. (by the way I think turbotax software had better to prohibit user to contribute if he or she does not have W2 form rather than always suggests users to contribute) Anyway I withdraw the $7000 contribution plus $8111 profit from the contribution on 12/31/2020 after 8 months. I've filed amendment for my 2019 return in January 2021 and paid 6% ($420) penalty for the contribution.

I received 1099R form about this transaction for the year of 2020. The box 1 shows total withdraw $15111, and box 2 shows taxable amount $8111 ($15111 minus $7000). The box 7 shows code 8J. I can understand 8 means return the excessive contribution. What I don't understand is the code J which means "early withdraw". I was way over 60 in 2019 and have Roth account for more than 5 years. I called Fidelity retirement specialists about this box7 code multiple times. They told me the same, it is by design whenever withdraw the excessive contribution. The computer will automatically generate code 8J indication the box 2 is taxable and they have no way to change it. They suggest me to check with turbotax to see if it can avoid to pay the 10% ($811) penalty for early withdraw because I am not supposed to. I run the turbotax program and updated the form several times and I don't see any dialog or question that I can answer to alter the result. Hope some one can help. Thanks!

[ThomasM125]

It is considered an early withdrawal because you withdrew the funds within the first five years of making the contribution. Your age does not factor into this calculation. Your age would only be a factor if you waited five years to make the distribution, then it would not be subject to an early withdrawal penalty.

[fanfare]

There is a loophole that would have allowed you to keep the $8,111 in your Roth IRA after paying the penalty if you handled your situation properly.

Too bad you did not know. Most people don't.

Since you know how to get 100% on a Roth in less than a year , try again with another  excess contribution. 

You can use the loophole.

[macuser_22 · Accepted solution]

Code J means that is is Roth.  

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

The "loophole" fanfare referred to  is a provision of tax law that that requires that a 6% penalty be paid on the excess if not withdrawn plus the earnings by the due date if the return.

Sometimes the earnings will be more than  the 6% penalty so it pays  to NOT get a return plus earnings before the filing date and withdraw the excess after the fining date as a normal distribution and then pay the 6% penalty.      Then the earnings stay in the IRA since the 6% penalty was paid.

Your $7,000 excess would have a $420 penalty but the $8,111 earnings would be untouched.