Excess Roth Contribution

[march3john]

I made an excess Roth IRA contribution on 2021 for $6942 due to lack of earned income. I discovered this while preparing  2022 taxes before filing. I called my brokerage and had them remove the contribution plus the earnings of $1040.59  minus  a withholding of 10% federal and $50. in state taxes so that I would not have to pay the 6% penalty. I am now totally confused  on how to report this on  my 2021 tax before I file since I assume  I wont be receiving a 1099-R until 2022. Please help I am totally lost Thanks

[DanaB27 · Accepted solution]

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 $7,982.59 (contribution plus earning)
7. Box 2a enter the earnings $1,040.59
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.

Do not enter the taxes withheld in box 4 and 14 when creating the 1099-R for 2021. The taxes withheld belong on your 2022 return and you will have to enter the 1099-R on your 2022 return as well. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

[Edited 2/28/2022 | 12:10pm PST]

[march3john]

Just a couple of questions you wrote that I should check the the IRA/SIMPLE/SEP box on my 1099-R form but when I click the ? next to that box TURBO TAX gives a reply that (this boxed is checked if your distribution is from a traditional IRA, SEP IRA, orSIMPLE IRA but not for ROTH IRAs ) So since one was a ROTH IRA should I still heck this box?  Also after I answer the 2022 1099-R question turbo asks  ( If I need to file a substitute 1099- R? ) Im not sure how to answer this since I haven't yet received my form

Thanks for all your help

[march3john]

Just a couple of questions you wrote that I should check the the IRA/SIMPLE/SEP box on my 1099-R form but when I click the ? next to that box TURBO TAX gives a reply that (this boxed is checked if your distribution is from a traditional IRA, SEP IRA, orSIMPLE IRA but not for ROTH IRAs ) So since  mine was a ROTH IRA should I still check this box?  Also after I answer the 2022 1099-R question turbo asks  ( If I need to file a substitute 1099- R? ) Im not sure how to answer this since I haven't yet received my form and is this considered a substitute?

Thanks for all your help

[DanaB27 · Accepted solution]

No, you will not check the IRA/SEP/SIMPLE box (below box 7) for a Roth IRA. I edited my answer above.

No, you do not need to select that this is a substitute 1099-R since you will later get the Form 1099-R. You only select a substitute Form 1099-R if you cannot get the form after trying everything to receive it.

@march3john

[march3john]

Hopefully this is my last question where I am asked  "Did you use your IRA to pay for any of these expenses?" what amount should I enter  in Another Reason the contribution alone or contribution plus earnings.  Thanks again for all your help

[DanaB27 · Accepted solution]

You will enter the earnings in the "Another reason" field if you are above 59 1/2.

@march3john

[akarm]

I am still confused after reading the many responses in this forum.  I, too, contributed excess Roth IRA contributions for 2021.  I have not yet filed my 2021 return.  My financial institution has been notified and is withdrawing the excess contributions and earnings.

My Roth contributions were entered under Deductions & Credits. During the interview process I also stated that the contributions were withdrawn before the due date.  I then completed a 1099-R giving the contributions, earnings, and codes PJ.  Since I am now 59 and 1/2, I entered the contributions and earnings in the "another reason" box to avoid the 10 percent withdrawal penalty on the earnings.  However, Turbotax is still issuing me a 6 percent penalty on the contributions - from schedule 2 line 21 (referenced by form 5329).  I don't know what else I can do to tell Turbotax that the original contribution was withdrawn.  Do I not even report the contribution to begin with, and instead just enter the 1099-R?  Thank you.

[akarm]

In looking at this further, form 5329 doesn't appear to be correct.  line 18 (enter your excess contributions from line 24 of your 2020 for 5329.  If zero go to line 23) is incorrect.  Line 18 has $6000 (which is the amount of my 2021 excess contributions.  I had no excess contributions in 2020).  Excess contributions for 2021 is blank (line 23).  Total excess contributions, adding lines 22 and 23 is $6000.  it looks like the penalty is for 2020 and not for 2021 - I had no excess contributions for 2020.  Not sure how the years became mixed up.

[dmertz]

@akarm , only the amount of taxable earnings (the amount that will appear in box 2a of the code PJ 2022 Form 1099-R) should be entered for the Other reason exception, not the entire amount distributed with the return of contribution.

[dmtbue]

I have a similar situation.  My Roth IRA contribution for 2021 was limited to a fraction of the $7000 due to earnings.  I too discovered this while preparing my 2021 taxes using TurboTax.  Note:  I am over 59.5 years old.

I contacted my brokerage and had them remove the excess contribution plus the earnings so that I would not have to pay the 6% penalty.  My question is how to enter this into TurboTax.

If I create a 1099-R in advance for the removal of the excess contribution and enter this into turbo tax, do I enter in the net contribution ($7000 - excess contribution removed) into the ENTER Your ROTH IRA CONTRIBUTIONS 

and $0 for excess contributions?

Thanks in advance for your assistance!

[macuser_22]

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@dmtbue wrote:

I have a similar situation.  My Roth IRA contribution for 2021 was limited to a fraction of the $7000 due to earnings.  I too discovered this while preparing my 2021 taxes using TurboTax.  Note:  I am over 59.5 years old.

I contacted my brokerage and had them remove the excess contribution plus the earnings so that I would not have to pay the 6% penalty.  My question is how to enter this into TurboTax.

If I create a 1099-R in advance for the removal of the excess contribution and enter this into turbo tax, do I enter in the net contribution ($7000 - excess contribution removed) into the ENTER Your ROTH IRA CONTRIBUTIONS 

and $0 for excess contributions?

Thanks in advance for your assistance!

---

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2021 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now 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 also 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 JP will not do anything in 2022 but the withholding will be applied to 2022.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2022 1099-R. - That makes it taxable in 2021 and not 2022

After the 1099-R summary screen press continue.

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.

Enter the explanation for the excess contribution and that you are reporting a 2022 1099-R on your 2021 tax return to avoid having to amend in 2022.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

[dmtbue]

The response addresses how to enter the 1099-R entry (thanks for that!)

but does not answer the 2nd part (entry of the allowed portion of the Roth IRA contributions)

[macuser_22]

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@dmtbue wrote:

The response addresses how to enter the 1099-R entry (thanks for that!)

but does not answer the 2nd part (entry of the allowed portion of the Roth IRA contributions)

---

There is nothing to enter.   Allowable Roth contributions do not go on a tax return.   However, there might be a "catch 22" because if only a part of the contribution is allowed then the returned part will b added to your AGI which can make even more of the contribution a new excess.  When you get a "return of contribution" on a partial excess you need to have more returned than the original excess to allow for that.

[dmtbue]

Two additional clarifications for our case.

When the brokerage removed the excess Roth Contributions that we found out about while working on taxes, they did not sell off the excess contribution.  Instead, they reclassified the excess contribution for 2021 as a Roth IRA contribution for 2022 about a week ago.  Again, a 1099-R form will be created and sent out in early 2023 for 2022 for these reclassifications for my wife and for me.

How does this change how we go about filling out taxes for 2021 in turbo tax in order to avoid penalties?

Note:  I am over 59.5 years old but my wife is not.

Thanks for your help!