Loss on withdrawn excess Roth IRA contribution

[mjlitz]

My MAGI is above the income limit for 2022. I contributed the full $6,000 in January of 2022, so I submitted an excess of contributions withdrawal calculation with my custodian (Fidelity) in February 2023. I determined that my reduced limit was $5,598. After their calculation based on earnings/losses, $342.60 was withdrawn in February 2023, below the $402 that I was "supposed to be withdrawing".

I looked at some other posts on TurboTax and read all the FAQs I found. I know that I won't get my true 1099-R until January 2024; the TurboTax FAQ instructed me to fill out a "dummy" 1099-R for the 2022 return. I put $342.60 in box 1, along with codes P and J in box 7, saying that this was for the year of 2023. I also said that I contributed $6,000 and added that I removed $343 before the filing deadline in April 2023.

TurboTax is still adding a Form 5329 to my taxes to file when I won't owe any 6% penalty. It's a very small amount ($3), but I'd just rather it be correct. What can I do so that TurboTax won't add Form 5329 and indicate that I owe the extra tax?

Thanks!

[DanaB27]

Yes, the earnings of the withdrawal of excess contributions will increase your MAGI and then can trigger another excess contribution. That’s why it is generally recommended to withdraw some extra.

If you want to avoid the 6% penalty for 2022 and future years you will have to remove the excess contribution plus earnings before the due date of the 2022 tax return. Please see What happens if I made an excess Roth IRA contribution for additional options.

Please make sure that when you create Form 1099-R for the excess contribution plus earnings withdrawal that the full distribution amount is entered in box 1. Only the earnings are entered in box 2a (if you have a loss enter $0). Please review the instructions below.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

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 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 2023 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 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

[dmertz]

The amount of contribution removed was $402, not $342.60.  $342.60 is the adjusted amount distributed to accomplish the return of $402 of contribution.

[Amy107]

I have the same issue, but am confused on how to enter the loss. I had an excess of 1200.00, but the account had a loss, so they removed 966.22, so in box 1 (enter total distribution (contribution plus earning)) do I enter 966.22 or 1200.00, even though 1200.00 wasn't removed? Thanks

[dmertz]

@Amy107 , in the 1099-R section enter the Form 1099-R as written.

In the Roth IRA contribution section, when TurboTax indicates that you have a $1,200 excess contribution and asks how much was returned, enter $1,200.

[Amy107]

Thank you, so I want to submit the 1099r this tax season, so I don't have to amend next year's return, and won't get the official one until next year, so I search turbo tax for the 1099r and enter the 966.00 as amount distributed?

[Amy107]

I have the same situation, so if there was a loss, in step 6, Box 1 enter total distribution (contribution plus earning) do I just enter the amount they removed? and I was over 1200.00, but had a loss and they only took out 966.00, and in step 7, Box 2a enter the earnings, just enter zero?

I want to file the 1099r on this year's return and I don't have the official 1099r.

Thanks

[dmertz]

On the code JP 2023 Form 1099-R they will be reporting $966 in box 1 and $0 in box 2a.  It up to you to provide in the required explanation statement included with your tax return that the $966 distribution is the loss-adjusted amount distributed to accomplished a return of your $1,200 contribution.