Excess Roth Contribution, Recharacterized

[wings9798]

In 2021 I made contributions to my Roth account $2925. In 2022 I've made $300 deposits for 2022. I've learned I cannot contribute to a Roth. I've instructed my financial advisor to put the $3225 back into our investment account. 

I'm now putting $3225 into my wife's IRA as a non-deductible IRA contribution for 2021 from our investment account. When I fill out the TT form and when I say I made 2021 Roth contributions it asked if I recharacterized them, which I did but i put the funds in my wife's account, I'm saying No. But I'm pulling the funds out so unless I say something TT thinks I've made a 2021 Roth contribution, but i've reversed it.

Should I forgo the Roth contribution question and say I deposited $0 for 2021?

[DanaB27]

You will enter the IRA contribution but enter the excess contribution amount as withdrawn by the due date on the penalty screen:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the penalty screen enter the contribution amount (without earnings and losses) as withdrawn by the due date 

Please be aware, that you can only enter a recharacterization if you request a recharacterization with your financial institute.

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of the 2021 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 2022 Form 1099-R 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 Form 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 to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 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")

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.

The withdrawal of the 2022 excess contribution plus earnings will be reported on a 2022 Form 1099-R with codes 8 and J and you will report them on your 2022 tax return.

[wings9798]

Thanks a lot for the quick response. You mentioned I can only request a recharacterization from my financial advisor. I did, But it will be recharacterized to my wife's IRA not mine. We were able to do because I withdrew the funds back to the original source. So I'm assuming this is not a recharacterization but simply a withdraw of funds.

[DanaB27]

Yes, this would not be a recharacterization since you had it returned to your original source and then contributed it to your wife’s IRA. A real recharacterization the bank would move it from your Roth to your traditional IRA.