How to Eliminate Excess Roth IRA Contribution 6% Add'l Tax after withdrawl

[gmc727]

Taxpayer made an ineligible/excess $7500 contribution to Roth IRA in 2023 due to MAGI limits.  The excess was withdrawn in Feb '24 before filing for 2023.  After initially entering this contribution, Turbotax generated a Form 5329 and 6% additional tax. Now that it's been withdrawn, I want to eliminate this 6% tax, but don't see anywhere in the step-by-step dialogue to describe this scenario.

[DanaB27 · Accepted solution]

To confirm, you requested to withdraw the excess Roth contribution plus earnings.

If yes, then during the IRA contribution interview you can enter that you withdrew the excess contribution on the "You Currently Have a Penalty" screen. Enter the $7500 excess contribution as withdrawn and then TurboTax will not calculate the 6% penalty.

1. Click "Deductions & Credits" (under Federal) 
2. Scroll down to "Retirement and Investments"
3. Scroll down and click "Update" next to "Traditional and Roth IRA Contributions"
4. Continue through the Interview until you get the "You Currently Have a Penalty" screen and enter the $7,500 as withdrawn.

You will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 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 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 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 2023?"
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 2024 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 "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.