Excess ROTH IRA Contribution Correction

[DK1038]

Hi,

• In 2020 I made $4,000 of excess contributions to a ROTH IRA.
• In 2021 I made $500 of excess contributions to a ROTH IRA.
• In April 2022 I realized my mistakes.
• In April 2022 I received a filing extension to October 2022.
• Later in April 2022 I withdrew the $4,000 excess contribution and earnings, 1099-R (Code J).
• Later in April 2022 I withdrew the $500 excess contribution and earnings, 1099-R (Code JP).
• Now I am trying to correct my taxes for 2020-2022.
• I am <59.5 years old.

I have been referencing this thread which is a similar situation: Similar Situation 

Here is what I think I need to do:

• Pay 6% penalty on excess $4,000 2020 contributions by submitting Form 5329 amending 2020 taxes.

I am confused as to what else I need to do:

• Since I withdrew all excess contributions before my 2021 extension tax date of October 2022, are either the $4,000 2020 excess contributions or $500 2021 excess contributions subject to the 6% penalty?
• Do I report the 2022 1099-Rs showing the withdrawals in 2021 or 2022? This is where I would pay the 10% early withdrawal penalty and income tax on the earnings?

Thank you for your time,

DK

Edit: Changed $3,800 to $4,000 - I'm using approximate values.

[DanaB27]

Yes, you pay the 6% penalty on the $4,000 excess 2020 contributions by submitting Form 5329 amending 2020 taxes. All you need to do is enter your Roth IRA contribution and TurboTax will create Form 5329 to calculate the penalty.

You will also have to pay the 6% penalty for the 2020 excess contribution on your 2021 tax return since it wasn't removed by December 31, 2021. 

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter the Roth contribution for 2021 of $500
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 of $4,000 (if it wasn't carried over).
7. On the penalty screen enter you removed the $500 excess contribution by the due date.

TurboTax will only calculate the penalty for the $4,000 excess 2020 contribution.

You will also report Form 1099-R with codes JP on your 2021 tax return. The earnings are taxable in 2021 and subject to the 10% early withdrawal penalty.

On your 2022 tax return, you will enter the excess contribution for 2020 (if it wasn't carried over automatically):

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 "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 of $4,000 (if it wasn't carried over).

You will also enter the regular distribution Form 1099-R with code J:

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2022 (the $4,000 excess contribution is included in the amount) on the "Enter Prior Year Roth IRA Contributions" screen
6. Answer the remaining question.

It seems you still will have a $200 excess contribution unless your Roth IRA was empty since you withdrew only $3800 of the $4,000 excess contribution. When making a regular distribution after the due date you will have to take the full excess amount (without considering earnings or losses).

[DK1038]

Thank you.

Could you please elaborate on the statement, "All you need to do is enter your Roth IRA contribution and TurboTax will create Form 5329 to calculate the penalty." 

Where do I enter my ROTH IRA contribution so that it automatically generates the Form 5329? I have opened my 2020 tax return in Turbotax Amend software but don't see any relevant section except IRA distributions. Or do I manually create a Form 5329?

Edit: I think this is due to that it will not let me amend 2020 taxes using the Online software, therefore I had to use the software download. It will only let me amend 2021 taxes using the Online software.

DK

[DanaB27]

Please follow these steps to enter your Roth contribution and then TurboTax will create Form 5329 for the penalty:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA” and enter the $4,000 Roth contribution
4. You should get a penalty screen at the end of this section.

or 

1. Click "Deductions & Credits"
2. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
3. Select "Roth IRA" and enter the $4,000 Roth contribution

Yes, you might have to use the downloaded software to amend your 2020 tax return.

[DK1038]

Thank you for the help.

For which, if any, years would my state taxes (MD) also be affected? 

DK

[DanaB27]

Your 2020 MD state taxes won't be affected by this. But your 2021 Maryland tax return will be affected by the distribution shown on Form 1099-R code JP. TurboTax will automatically carry the amount over to the state return.