@dmertz (or anyone who can provide clear and concise answers)
I opened a Roth IRA account in Jan 2021 (this year) and made contributions for 2020 and 2021. I discovered this month- Feb 2021- that the entire amount of both the 2020 and 2021 contributions was over the limit. In other words, I should not have contributed anything in either 2020 or 2021. I have not yet filed my 2020 taxes. I have earned interest on both the 2020 and 2021 contributions. I have not received a 1099-R and I'm not sure I will (I have requested one but have not heard back). Could someone let me know step by step what I need to do on turbo tax? Let's assume I do not receive the necessary 1099-R and will need to complete a substitute 1099-R.
You can do one of two things and both will produce a 2021 1099-R that you will not receive until Jan of 2022.
1) Request a "Return of Contribution" plus earnings (not a regular distribution) from the IRA custodian. Only the interest (earnings) will be taxable and possible have a early distribution penalty of you are under age 59 1/2.
2) Ask the IRA custodian to recharacterize the excess Roth plus earnings to a Traditional IRA. Then there is no tax at all and the earnings are simply transferred to the Traditional IRA. If you have NO other Traditional IRA accounts anywhere then you could have that Traditional IRA converted to a Roth IRA (known as a backdoor Roth) if you choose to make the recharactorized contribution non-deductible. The tax on the conversion will be offset by the non-deductible contributions. (You do not need to do the conversion and just leave the money in the Traditional IRA.)
I have already withdrawn the Roth IRA excess contributions and earnings interest for 2020 and 2021 so not thinking about recharacterization at all. I'm under 59. I have not received a 1099-R although I've requested one. I'd like to know how to report this information on Turbo Tax with specific step by step instructions assuming I must file a substitute 1099-R. I have not yet filed 2020 taxes.
No you do not use a substitute because you have not received 1099-R to substitute for. A substitute in only to fix a defective 1099-R that the issuer refused to correct and you must tell the IRS the steps you took to get a corrected 1099-R. Since these were 2021 distributions the 1099-R will be issued in January or 2022. The 2021 returned contribution will go on your 2021 tax return next year.
The 2020 returned contribution must go on an amended 2020 tax return.
(This is NOT a substitute 1099-R but a real 1099-R just reported early.)
*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2020 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 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld.
The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2021.
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 2021 1099-R. - That makes it taxable in 2020 and not 2019
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 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.
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.
Since you have not yet filed your 2020 tax return, you'll just make the entry on your original tax return as macuser_22 otherwise described.
The 2021 Form 1099-R for the 2021 contribution will have codes J and 8 rather than J and P, reportable on your 2021 tax return. You'll receive the code J8 2021 Form 1099-R before you file your 2021 tax return.
In each case you'll need to enter into TurboTax for the particular year the original Roth IRA contribution made for that year, allow TurboTax to tell you that it's an excess contribution, then indicate that you've removed that same amount by a return of contribution. This will record the amount originally contributed and the (same) amount of contribution returned and it will cause TurboTax to prompt you after you click the Continue button on the Your 1099-R Entries page to prepare an explanation statement regarding the return of the contribution that had been made for that year.
I've just received an update from my Roth IRA custodian. The contributions have been reported as excess removal/returned contributions but I will receive only one 1099-R reporting both the 2020 and 2021 returned contributions next year in Jan 2022.
What should I do in this specific case? My Roth IRA custodian was kind enough to provide me with four amounts: the 2020 contribution and the interest earned as well as the 2021 contribution amount and the interest earned on that portion.
I know this may require repeating some of the above mentioned information, but I just want to be sure that I correctly understand what to do. Could you please list step by step what I should do in this specific case? And what I should input into Turbo Tax. Please list out each step. (I'm under 59) Thank you.