Does the initiation of excess funds removal count toward 2023's filing?

[annmarriott1]

Today (4/15/23) I initiated an excess funds removal from my traditional IRA. I did this because while I was filing my taxes yesterday I learned that I would be penalized for a contribution that's greater than my income. I have not completed filing my taxes just yet, but I plan to today. And, the bank with which I initiated the removal said the removal will not be complete for about three days.

I'd like to not report the contribution on my filing since the initiation happened today, but will the date of initiation be honored?

If that will be a problem, can I file an extension so that the funds removal will definitely be done before the October deadline? If I go this route, would I need to pay the IRS the 6% penalty when I file the extension? And would that payment be refunded to me after I eventually file?

[DanaB27]

You have until the extended due date the withdraw the excess contributions plus earnings. To confirm, you requested the withdrawal of excess contributions plus earnings?

"If you timely filed your 2023 tax return without withdrawing a contribution that you made in 2023, you can still have the contribution returned to you within 6 months of the due date of your 2023 tax return, excluding extensions." (Pub 590-A).

If you removed the excess contribution plus earnings then please make sure you enter the excess contribution amount as withdrawn on the penalty screen at the end of the IRA contribution interview. 

If you made an excess contribution in 2023 and withdrew the 2023 excess traditional IRA contribution plus earnings in 2024 before the extended due date, then you will get a 2024 Form 1099-R in 2025 with codes P and 1. This Form 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 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 2024 Form 1099-R into the 2024 tax return since the withholding is reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholding will be applied to 2024.

To create a Form 1099-R in your 2023 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 2023?"
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 2024 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

[annmarriott1]

Yes, I contacted my bank today and INITIATED the funds removal, but they said the removal will not be complete for another three days. How does that affect my penalty liability?

• will I have to pay the 6% penalty when I file my taxes today? If so, how do I get that penalty paid back to me after the funds removal is complete?
• or, would filing an extension be a good option to avoid paying the 6% penalty? Once the removal is complete this week (hopefully), I can go ahead and file asap. Edit: FYI I don't owe any other tax since I didn't have any income.

[DanaB27]

No, you do not have to pay the 6% penalty since you are removing the excess contribution plus earnings before the extended due date. Make sure you enter the excess contribution amount as removed on the penalty screen at the end of the IRA contribution interview.

You might want to file the extensions if you plan to avoid amending the 2023 return. You will need to know how much earnings were returned with the excess contribution if you want to enter the  2024 Form 1099-R on your 2023 return.

Please see How do I file an IRS tax extension?

[annmarriott1]

Ok thanks. Are you saying that if I go ahead and file today then I will have to file an amended return? How would it be different since I would indicate the amount of removed excess from today's filing?

Edit:

"You might want to file the extensions if you plan to avoid amending the 2023 return. You will need to know how much earnings were returned with the excess contribution if you want to enter the  2024 Form 1099-R on your 2023 return."

Wouldn't the 1099-R be required? I'm interpreting that you mean it's optional. I will likely not have earned anything from the excess contribution by the time the removal is complete, because as of today I have lost money on the investments.

[DanaB27]

If you sure that you had a loss then you can go ahead and file.

If you made the excess traditional IRA contribution in 2023 for 2023 and then withdrew it in 2024 then you will have code P and 1 on your 2024 Form 1099-R, and it will have to be reported on your 2023 tax return. Only the earning in box 2a are taxable on your 2023 return.

You can enter the 2024 Form 1099-R with the instructions mentioned in the previous post before you file your original return. If you had a loss then you will enter $0 in bx 2a.

If you had a loss then you do not need to amend the 2023 return since you do not have a taxable income to report.

[Edited 4/15/2024 | 9:37 am PST]

@annmarriott1 

[annmarriott1]

Thank you for all the information.

I think I'll file an extension so that I can get an accurate amount for Gross Distribution on the 1099-R. The bank said I can get that after the excess funds removal is complete. I'm pretty confident I won't have any gains by then, but I'd like to get an accurate amount all the same.

I appreciate all your help.