Excess Contributions on Roth IRA

You say that the earnings have to be reported and taxed in 2021.  Does that mean I have to make up a 1099-R  in order to report it on the 2021 tax return or just wait until the 1099-R comes in 2023?  If I wait until next year to report it, will I have to amend the 2021 return?

We are older than 59 1/2, so that is not an issue.

This seems easy enough, but why have other people with this same question gotten the advice to make a 1099-R?  With a 1099-R the info will appear in form 1040 on line 4a and 4b.  Is it ok for this info to just appear on line 8 (Other Income) of 1040 with an explanation of "Excess earnings for excess contributions of Roth IRA"?  (On line 8, I put just the earnings.  On line 4a would be the total distribution and line 4b would be the earnings on that distribution if one had a 1099-R.)  

Is there a difference, or can you do it either way?

It should make a difference.

You will be taxed on the earnings for the excess contributions, plus the 10% penalty. If reported using 1099-R, the 10% additions to taxes will be calculated properly. If reported as other income, the 10% won't be calculated properly, if calculated at all.  

@Juir

We are taking the excess contributions and earnings on those contributions in 2021 out of the Roth IRA before the tax deadline of April 18, 2022.  This has already been done.  Here's what I found online:

Withdraw the excess contribution before filing your tax return. The IRS treats this as though the contribution never happened, and no 6% penalty will apply. You must also remove any earnings on the investments during that time period. The earnings must be included in your income, and you will have to pay income taxes on them. If you are under age 59 ½ you will also need to pay a 10% early withdrawal penalty, but only on the investment earnings attributed to the excess contribution. 

We are over age 60, so there should be no penalty for early withdrawal.  We just have to pay taxes on the earnings.  Next January we will receive a 1099-R with all of this info on it, but we need to report it now on our 2021 return.

So, the question remains -- Do we have to make up a 1099-R for this, or can we just put it in "Other Income"?

Yes, you will have to create a 1099-R for the withdrawal of excess contribution plus earnings if you want to avoid amending your 2021 return.

You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R 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.

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 under "Another reason" if you are over 59 1/2 (if you under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

[Edited 3/5/2022 | 2:00pm PST]

@Juir

Thank you.

Why do I put J in box 7 when J is for Early Distribution from a Roth IRA.  We are over 60, so it is not an early withdrawal.  It is a withdrawal to correct an excess contribution because we had no earned income in 2021.  Can I just put P and nothing else.  P is excess contributions plus earnings in 2021?

Do I have to put J and P for some reason in box 7 of a substitute 1099-R?  When we get the real 1099-R from our investment company in Jan 2023, I don't know what letters or numbers will be on it.  (We discovered the excess contribution for 2021 in Feb of 2022 and the transaction to return excess contribution and earnings on excess contributions was done in Feb of 2022.)

Also, when creating this substitute 1099-R, why would I say yes that I have received a 1099-R for 2021 when I didn't receive one.  I will receive a 1099-R in 2023, but I don't know what date will be on it.  I don't know if it will say 2021 or 2022.  Excess contributions were made in 2021 and there were earnings in 2021 and we have to pay taxes on the earnings in 2021, but don't know how the 1022-R will be labeled.  Also, some transactions were made in 2022 from that Roth IRA, so those transactions will be labeled 2022.  But, concerned about the 2021 transactions now.  I want to do the paperwork and tax return correctly so we won't have to amend the return next year.

You should enter code 8 for a 2021 1099-R, the code P applies to a 2022 1099-R. You shouldn't answer that a form 1099-R was issued in 2021.

@Juir

[Edited 3/3/2022 at 12:11 PM PST]

This is very confusing.

I have the IRS instructions for 1099-R.  For Box 7 codes, it says:

8 -- Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2022.

P -- Excess contributions plus earnings/excess deferrals taxable in 2021.

Aren't our earnings on excess contributions taxable for the year 2021 and therefore P??

And, what year should I put on the substitute 1099-R.  The investment company will send us a 1099-R in January of 2023 for this withdrawal transaction, but I think it will have 2022 for the year.

The instructions you are referring to are for a 2022 form 1099-R. When you pull it up from the IRS website, they show the form for 2022. It is different from the one you are entering for 2021.

You made the excess contributions in 2021 so that is the year you need to add the substitute 1099-R for. In 2023, you will get a form 1099-R showing year 2022 on it. Hopefully, it will have code P in box 7, which says it was taxable in 2021. If so, then you just need to enter it and be done with everything!

OK for the code.

I talked to an accountant today and to the IRS.  Both said I shouldn't be making a fake or substitute 1099-R.  The problem is

1. I need to report the earnings on excess contributions to a Roth IRA made in 2021 on my 2021 return.
2. IRS said these earnings need to be reported on lines 4a and 4b.
3. The real 1099-R won't come until Jan of 2023.
4. The only way I could get Turbo Tax to put the earnings in the right place was to make a "fake" 1099-R and mark the IRA/SEP/Simple box and put code 8 in Box 7.

Questions:

1. When I e-file, will the 1099-R's be sent to the IRS?  
2. Will only 1099-R's with federal tax withholdling be sent to IRS?
3. Is there any other way to get earnings on excess contributions to Roth IRA to go into the correct place on Form 1040 (lines 4a and 4b)?
4. If not, do I make a regular 1099-R or a substitute 1099-R?

Turbo Tax needs to find a better way for filers to report this info without resorting to making up 1099-R's.

Too bad you get five different answers from so-called experts to a simple question that happens all the time.

Too bad TurboTax Online and TurboTax CD/download have different behaviors in these situations.

search the forum for answers from dmertz

on your question and you will get correct information.

Or ping him with the at sign.

I tried but couldn't find an answer to my problem from dmertz.

But you are right.  This should be easy problem to fix on Turbo Tax and report to IRS in the best legal way.

What did you end up doing? Did you create the "fake" 1099-R and e-file through TurboTax with it?

You will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of an 2023 excess contributions and earnings. This 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 withholdings are 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 withholdings 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 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 2024 Form 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 "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" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

@captainstress 

Thank you, DanaB27.  That is what I've done and it looks good to me.  I just worry that the 1099-R I "made up" to make TurboTax do its thing will confuse the IRS since I basically guessed the address that will be on the actual 1099-R that I'll receive later.  I suppose it doesn't matter if this 1099-R entry is just used to get the values in the right place on the e-filed 1040.

Re:  How to Handle Excess Contributions to a Roth IRA because of no earned income in that year.

I got varying answers from the Turbo Tax community, so I called the IRS and luckily got someone who knew what they were talking about.  I did not want to make up a 1099-R because I knew I would get one in the following year.  It has been over a year since this happened, so I'll try to remember.

First, we contacted the investment company where the excess contributions were made.  They sent us a letter stating how much was being returned to us and what the earnings were.  This excess contribution happened in 2021, but we didn't realize the mistake until Feb of 2022 -- which was before the tax filing deadline.   You have to pay the taxes on the earnings you made in the year that you had the earnings.  So, on our return I had to put the amount of this contribution that was returned on line 4a of 1040 and the earnings of excess contribution on line 4b.  (I can't remember if Turbo Tax allowed me to just add it in myself or if I had to pretend like I had a 1099-R for it.)  There is a way that you can add statements to your return explaining what is happening.  I did this.  I also typed up a letter explaining everything and also made a chart of what line 4a and 4b included because I had other amounts to put on line 4a and 4b.  I then included a copy of the letter that the investment company sent us detailing the amount that was returned -- investment and the earnings on the investment.  

Then I did not e-file this return.  If I made up a fake 1099-R to get numbers to go in lines 4a and 4b, I did not  want to send it to the IRS.  So, I removed the fake 1099-R and mailed the return along with my letter and the letter from the investment company.  I explained that I was paying taxes on the earnings now with my 2021 1040 return before the deadline of April 2022 so that there would be no penalties.  I also explained that I would not get a 1099-R on this transaction until Jan 2023.

Then in Jan 2022 we received the 1099-R for the transaction.  Again I made an explanation statement in our 2022 1040 return which you can do in Turbo Tax.  In the statement, I used my husband's name because it was his Roth IRA.  Here I will write H for husband.    This is what I wrote " H made an excess contribution to his Roth IRA of $2400 in 2021.  We had no earned income in 2021, so in February 2022 he realized this mistake and withdrew the excess contribution along with the earnings on this contribution before the return was due.  the earnings on the excess contribution were reported on our 2021 tax return on 1040 line 4b, and we paid taxes on the earnings of this excess with our 2021 return.  We received a 1099-R for 2022 in 2023 for removal of the excess contribution of $2400 and earnings of $123.71 for a total of $2523.71.  It does not appear on line 4a and 4b of our 2022 return because we already put it in our 2021 return before the tax deadline.  We did not have the 1099-R yet at that time, but we had a letter from the investment company with the correct amounts which we included in our 2021 return.  H is over the age of 59 1/2 so there are no penalties.  The issue of the excess contribution in 2021 and resulting earnings was taken care of (taxes paid) in Feb 2022 before the tax filing deadline for 2021 and addressed on the 2021 return."

Notice that we had to take care of this problem on 2 tax returns.  On the first return we put the amounts on line 4a and 4b, paid the taxes, included 2 letters, and mailed the return.  The next year, we included the 1099-R and any appropriate letters/numbers as the code of explanation, and also made the statement above in verbal explanation.  I e-filed for the 2022 return.  Remember that you have to pay the taxes for the year of the excess contribution.  You can't wait until you get the 1099-R.  I wasn't comfortable making up a 1099-R and sending it to the IRS because I think 1099's are reported to the IRS and they wouldn't have received one from our investment company and our made up one wouldn't have matched anything.  (Again, I called the IRS and the man we spoke to told us what to do.  You can also call the IRS to make sure you are doing the right thing.  If you do not like the explanation of the person you talk to, you can call again and you will get a different person to talk to who may really know.  This happened to us.)  So far we haven't heard from the IRS so hopefully all is well.  If they ever do contact us about this, I paid the taxes in the year they were due.

In my previous explanation, I think at the beginning of paragraph 4 I meant to write Jan 2023.  It's confusing.

Thank you for the follow-up and tips.  It is a good reminder that the tax on the earnings is due when filing the year of the excess contribution, not the year you extract them from the Roth.