Handling excess Roth contributions with a negative NIA

[T1390]

In 2022 I contributed $6000 to my Roth IRA. My MAGI was enough to place me into the Roth IRA phase out. I did not realize this until 2023. I overfunded the Roth IRA by $1000. 

I completed a removal of excess contribution form with my brokerage and the net increase attributable was -$100 because the Roth IRA decreased in value after the contribution was made so $900 was removed from the account. 

How do I handle this on my tax return? Do I change the contribution amount on the IRA contribution forms from $6000 to $5000? Do I need to complete a substitute 1099R form since the brokerage did not send me one? I would like to address this now so I don't have to worry about it next year. 

(Round numbers were used to make the math easier)

[trusharp]

You can create a sub 1099-R which should have box 7 filled in with 8. You are in good position to do this bc - 1. Roth is after tax, 2. there is loss and no gain to pay taxes on, and 3. it is for current filing year 2022. You probably did not get the form from the brokerage bc they will send it next year for 2023 and it will have a P in box 7. That form could simply be ignored.

There is a real good interactive tool for this, see the link below. I wish I knew of this tool bc I have a worst problem where the access was in inactive 401K and that brokerage is not willing to create the transaction. Anyway, try this link. It is for Roth as well.

https://www.irs.gov/help/ita/how-do-i-correct-an-excess-salary-deferral-to-my-401k

[MinhT1]

If you withdrew your 2022 excess contribution to your Roth IRA before the due date of the 2022 tax return (April 18, 2023), make sure that you also withdraw the related earnings/losses. You have already done this.

On your 2022 tax return, you do not report the excess contribution as it has been withdrawn. The earnings have to reported and taxed in 2022. These earnings are also subject to 10% early withdrawal penalty if you are younger than 59 1/2.

In your case, only report Roth IRA contributions of $5,000.

If there is a loss, that loss is not deductible.

When you receive the 2023 form 1099-R (in 2024) for this withdrawal, there is no further action needed.

[T1390]

Do I need to create a substitute 1099R prior to filing my 2022 taxes? Or is there no 1099R due to there being no taxable gain?

[DanaB27 · Accepted solution]

Yes, you can add a 2023 Form 1099-R with codes P and J to avoid amending the 2022 tax return. This won't be a taxable event since you had a loss but Turbotax will add an explanation statement for the returned excess contribution, where you can state that you withdrew the excess contribution of $1,000 minus the loss of $$$.

To create a Form 1099-R in your 2022 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 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution minus loss)
7. Box 2a enter $0
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 2023 Form 1099-R.

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

@T1390 

[trusharp]

As I understood, the excess contribution was in 2022 and it's withdrawal was in 2023. You should create substitute 1099-R for that withdrawal (TT will put code 8 in box 7) now and file it with your 2022 taxes. This will effectively conclude this correction. Because the withdrawal was in 2023, you will get 1099-R from your brokerage, codded P in Box 7, in 2024 which you will then just file away for your record. No further action will be needed in 2024, except to be aware of the purpose of that form.