Excess ROTH IRA contributions

[kbijwaard]

Because of my AGI, I became ineligible to contribute to my Roth IRA in 2021.  I contributed $2,600 last year, but have also contributed $700 this year, and unless the market totally crashes, I probably won't be able to contribute in 2022 because my AIG will likely be over the limit this year too.  So, two questions.

1) When I withdraw/recover the $2600 contributed in 2021 can I go ahead and withdraw/recover the $700 from this year too plus the earnings and include the penalty for the early withdrawal of the earnings? Or should I just withdraw/recover the excess from last year and deal with the contributions made this year later?

2) Do I need to notify the institution where my IRA is that I need to return the excess contributions, or can I just transfer them (and the earnings) to another account at the same institution.

Thanks in advance.

[DanaB27 · Accepted solution]

1) Yes you can request to withdraw the excess contributions for 2021 and for 2022 plus earnings. The earnings for the 2021 excess will belong on the 2021 return the earnings for the 2022 excess will belong on the 2022 return.

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of 2021 excess contribution (2,600) 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 withholdings are 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 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 "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.

2) Yes you will need to request the return of excess contribution plus earnings with your financial institute to get the correct Form 1099-R.