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jdjdjdjd
Returning Member

IRA excess contribution, no income, rolled over.

I have an interesting situation here.

 

I have no income for year 2020, yet at very start of the 2020 I contributed 6000$ for 2020 to my traditional IRA and rolled it over along with existing traditional IRA fund to Roth IRA, anticipating I will make enough to contribute 6000$.

However, I didnt have any income for year 2020. I know that it is excess contribution, however what account should be rectifie, how?

1. My traditional IRA? as that is where the initial contribution was been made?
2. Roth IRA? as money was contributed to that account at the end?

Do I have to take care of any nuances, that I may not be aware of?

8 Replies
DanaB27
Employee Tax Expert

IRA excess contribution, no income, rolled over.

Yes, you will have request a withdrawal of excess contribution plus earnings with your bank from the traditional IRA by the due date.

 

Only the earnings will be taxable in 2020 and if you are under 59 1/2 you will have to pay the 10% early withdrawal penalty.

 

If you withdraw the 2020 excess contribution plus earnings in 2021 before the due date, then you will get a 2021 1099-R in 2022 with codes P and 1 (if you are under 59 ½, otherwise enter P and 7). This 1099-R will have to be included on your 2020 tax return and you have two options: 

  • You can wait until you receive the 2021 1099-R in 2022 and amend your 2020 return or
  • You can report it now in your 2020 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 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in the 2021 tax return but the withholding will be applied to 2021.

 

To create a 1099-R in your 2020 return please follow the steps below:

  1. Login to your TurboTax Account 
  2. Click on the Search box on the top and type “1099-R”
  3. Click on “Jump to 1099-R”
  4. Answer "Yes" to "Did you get a 1099-R in 2020?"
  5. Select "I'll type it in myself"
  6. Box 1 enter total distribution (contribution plus earning)
  7. Box 2 enter the earnings
  8. Box 7 enter P and 1 (if you are under 59 ½, otherwise enter P and 7)
  9. Click "Continue"
  10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

 

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jdjdjdjd
Returning Member

IRA excess contribution, no income, rolled over.

Dana, thanks for the prompt response !

However, I still fail to comprehend few things-

 

Yes, you will have request a withdrawal of excess contribution plus earnings with your bank from the traditional IRA by the due date.

 

But my fund (originally deposited in traditional IRA for 2020, to be rolledover to Roth) has already been rolledover to Roth IRA (2020). Do you mean that I need to get the fund back (somehow) to Traditional IRA and withdraw it from there?

Or Should I be withdrawing from Roth IRA (where it is residing right now) itself?

What are the steps if it is the latter?

jdjdjdjd
Returning Member

IRA excess contribution, no income, rolled over.

I would appreciate the update.

Thanks

fanfare
Level 15

IRA excess contribution, no income, rolled over.

if you expect to make 6000 this year, just leave it alone.

Pay the penalty for 2020  and apply your 2021 income to resolve this.

Review form 5329 for the details.

jdjdjdjd
Returning Member

IRA excess contribution, no income, rolled over.

@fanfare 

 

Thats a great advice. So, just to make sure if I am understanding it correctly-

 

Currently -

Trad IRA - 0$

Roth IRA - X$

Pay 6% penalty and contribute towards 2021 in

Trad IRA - 6000$

Roth IRA - X$

Remove excess from Trad IRA for 2020, resulting in -

Trad IRA - 0$
Roth IRA - X$

Does this sound right?

jdjdjdjd
Returning Member

IRA excess contribution, no income, rolled over.

and in that case, why cant I just contribute 6000$ towards 2021 in my traditional IRA, before tax deadline and remove the same amount towards "Excess contribution removal for 2020?!"

Just curious.

fanfare
Level 15

IRA excess contribution, no income, rolled over.

No.

If you make $6,000 you contribute nothing .

you apply the $6,000  on 2021 Form 5329.

That removes your excess status.

the custodian is not involved.

 

if you make less than 6000, you can apply what ever it is, and you will have another smaller penalty for still having a smaller excess.

 

Presumably, Your Roth IRA is growing through all this.

fanfare
Level 15

IRA excess contribution, no income, rolled over.

If your income is too high to permit a Roth contribution, the strategy won't work.

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