Multiple excess Roth IRA contributions and withdrawals

[tabula101]

Hey folks, I was hoping to get your help with dealing with multiple excess Roth IRA contributions and withdrawals. I've gone through a ton of other forum posts and have a general idea of what to do, but I'm hoping you can double check what I've done.

In particular, I'm looking for double-checking of the following:

• My 2023 1099-R form: I will only get my 2023 1099-R form next year but I want to include it in my 2022 tax return this year so I am forced to guess what it will look like
• My 2022 tax return: I'm not sure what exactly to enter for many of the TurboTax questions
  (eg. Do I enter my ACTUAL contribution (including the excess) or what I was SUPPOSED to contribute (without the excess))

For your convenience, I've added both a brief summary and a detailed timeline below:

Summary

• 2021 Roth IRA
• April 2022: Made excess contribution of $3,050
• April 2022: Withdrew $3,050 + earnings of $15.36
• 2022 Roth IRA:
• April 2022: Made excess contribution of $6,000
• April 2022: Withdrew $1,450 + earnings of $7.30
• April 2023: Withdrew $4,550 - loss of $85.69
• 2022 1099-R form: Code 8J
• 2023 1099-R form: Code PJ
• 2021 Tax Return:
• Reported what I was supposed to contribute to 2021 Roth IRA
• No 1099-R form
• 2022 Tax Return:
• Reported what I was supposed to contribute to 2022 Roth IRA
• Reported $3,050 actual excess contribution to 2021 Roth IRA
• Added both 2022 and 2023 1099-R forms

Detailed Timeline

2022

Excess Contribution

On April 12 2022, I made the following Roth IRA contributions:

• 2021 Roth IRA: Contributed $6,000
• 2022 Roth IRA: Contributed $6,000

Withdrawal

Shortly afterwards, I realized that, based on my 2021 income, my 2021 contribution was too high so I withdrew the excess from my 2021 contribution. Obviously I didn't know my 2022 income yet but, to be safe, I compared my 2021 income to the 2022 Roth IRA contribution limits and preemptively made a partial withdrawal from my 2022 contribution as well.

i.e. On April 14 2022, I made the following Roth IRA withdrawals:

• 2021 Roth IRA:
• Requested withdrawal of $3,050
• After including earnings of $15.36, received distribution of $3,065.36
• 2022 Roth IRA:
• Requested withdrawal of $1,450
• After including earnings of $7.30, received distribution of $1,457.30

Thus, in 2022, I received a total distribution of $4,522.66 (including total earnings of $22.66)

2021 Tax Return

In April 2022, I filed my 2021 tax return with the following information:

• 2021 Roth IRA contribution: $2,950
• Note that I entered what I should have contributed, not what I actually contributed
• Excess contribution for prior years: $0
• 1099-R form: None

2023

Withdrawal

Next year, after getting my final 2022 income, I realized that actually I was not allowed to contribute anything to my 2022 Roth IRA so I made another withdrawal to remove the rest of it.

i.e. On April 15 2023, I made the following Roth IRA withdrawal:

• 2022 Roth IRA:
• Requested withdrawal of $4,550
• After including loss of $85.69, received distribution of $4,464.31

2022 Tax Return

I haven't filed this yet (extended deadline to Oct 16 2023), but this is what I have entered so far:

• Roth IRA contributions from prior years: (includes the $2,950 I should have contributed to the 2021 Roth IRA, not what I actually contributed)
• 2022 Roth IRA contribution: $0
• Note that I entered what I should have contributed, not what I actually contributed
• Excess contribution for prior years: $3,050
• Note that this is the excess I actually contributed to the 2021 Roth IRA only
• 1099-R forms:
• 2022 1099-R form:
• Issued in Jan 2023
• Total distribution (box 1): $4,522.66
• Total taxable earnings (box 2a): $22.66
• Distribution code (box 7): 8J
• 2023 1099-R form:
• Has NOT been issued yet, so I am just guessing that this is what it will look like!
• Total distribution (box 1): $4,464.31
• Total taxable earnings (box 2a): $0
• Distribution code (box 7): PJ
• In the end, TurboTax added $23 (presumably rounded up from my $22.66 total earnings) to my taxable income.
• Note that it did not seem to charge me any additional 10% early withdrawal penalty on the earnings

[tagteam]

Another one for @dmertz 

[tabula101]

Thanks @tagteam . 
@dmertz  Have you had a chance to take a look at my post yet? Tax deadline is in a few days so would appreciate your thoughts before then

[dmertz · Accepted solution]

In 2021 and 2022 TurboTax, enter the actual contribution made for the particular year, then indicate how much of that year's contribution you asked to be returned (not the adjusted amount distributed to accomplish that return of contribution).  TurboTax will prompt you to prepare an explanation statement for these returns of contribution.

Both of the Forms 1099-R need to be reported on your 2022 tax return by entering them into 2022 TurboTax.  Be sure that for the code PJ 2023 Form 1099-R you indicate that it's a 2023 form.  The $15.36 plus $7.30 of earnings distributed in 2022 are indeed subject to a 10% early-distribution penalty on your 2022 tax return because the distributions occurred before December 29, 2022 when such penalties on corrective distributions were eliminated and (presumably) you are under age 59½.  With code J being present, I see no reason why TurboTax would not be calculating a 10% penalty on this amount on Part 1 of Form 5329 unless you claimed (possibly incorrectly) a penalty exception on line 2.

[tabula101]

Thanks @dmertz ! I'm a little confused about the contribution though, since TurboTax's instructions seem to imply that, if I withdraw part of my contribution, then I should enter only the remaining amount (the "effective" contribution / what I should have contributed):

Here are the instructions on how to correct an excess Roth IRA contribution, taken from 2023 TurboTax online:

There are several options available for correcting excess contributions. ... The options available include:

...

2. Withdraw the excess (including any money you earned on it) before the filing deadline for your tax return. If you do this, you'll need to correct the amount you entered in TurboTax as your contribution.

Are you saying this instruction is wrong or am I misinterpreting it?

[dmertz]

The instruction you quoted is incorrect.  If you enter only the net contribution, TurboTax will not prompt you to provide the required explanation statement for the return of contribution.

[tabula101]

@dmertz I see. Of course I can easily change my contribution in my current (2022) tax return but, given that I already filed my 2021 tax return last year, do I need to file an amendment or something to change my contribution there as well?

[dmertz]

The only difference is the explanation statement.  If your 2021 tax return did not include the explanation statement, I wouldn't bother with it unless the IRS asks for it.

[tabula101]

Sounds good, thank you!

[tabula101]

@dmertz Quick q: In the 2022 tax return, there's a section to do with tracking my Roth IRA's basis. In that section, it asks for the total amount of  prior contributions: I assume I need to include my 2021 Roth IRA contribution in that section but, again, I'm not sure if I should be including the actual (excess) 2021 contribution or the net (after withdrawal of excess) 2021 contribution -- can you clarify which?

[dmertz]

Your basis does not include any Roth contributions that were recharacterized to be traditional IRA contributions or any Roth contributions that were returned.  Regular Roth IRA distributions also reduce your basis.

[tabula101]

@dmertz Ok, so sounds like I need to include only the net (after withdrawal of excess) 2021 contribution in my basis -- thank you!

[tabula101]

@dmertz I tried to finalize my return yesterday and ran into a ton of issues with the Form 5329 that TurboTax generated, where the entries didn't make sense. I think I fixed it now, but could you please take a look as well to validate before I file?

After a couple of hours of trial and error, I managed to get a reasonable-looking form 5329 by making the following changes in TurboTax:

1. At one point, TurboTax asks you to enter "Your Excess Roth IRA contributions for Prior Years". Initially, I put down $3,050 (since that was the excess for my 2021 Roth IRA) but then I noticed I was being charged a 6% penalty even though I withdrew that excess before the 2021 tax return deadline.

So, I figured what TurboTax actually meant was "Your Excess Roth IRA contributions for Prior Years, that have still not been withdrawn" -- since I withdrew all $3,050, I changed my entry to $0 and the 6% penalty went away as expected.

2. As mentioned before, I wasn't getting charged a 10% penalty for the $22.66 earnings prior to Dec 29 2022, which didn't make sense. I finally realized why this was happening:

After I tell TurboTax that I made early withdrawals from my Roth IRA, it brings me to a section that says "Let's see if we can reduce your early withdrawal penalty" where it basically lists a bunch of possible exceptions to the 10% penalty. One of the boxes says "Corrective distributions made on or after Dec 29 2022". Initially, I entered $4,464 in that box, since that's what I received from my April 2023 withdrawal from my 2022 Roth IRA. I did so because both the IRS and TurboTax seem to define "distribution" as "returned contribution + earnings". However, for some reason, TurboTax seems to expect ONLY the earnings in this particular box, which in this case is $0 (since I made a loss).

i.e. If I set "Corrective distributions made on or after Dec 29 2022" to be $4,464, TurboTax seems to do $23 - $4,464 = less than $0, therefore there were no actual earnings before Dec 29 2022, therefore there is no 10% penalty.
Once I changed "Corrective distributions made on or after Dec 29 2022" to be $0 (indicating that my entire $23 earnings were received before Dec 29 2022), then I correctly get charged a 10% penalty on my $23 earnings (i.e. $2).

I have attached a pic of my form 5329 generated by TurboTax (with sensitive info redacted) -- would you mind taking a look and confirming that there are no obvious issues before I file?

[dmertz]

1.  Correct.

2.  That box on for penalty exceptions should be labeled, "Earnings on corrective distributions made on or after December 29, 2022,"  so your Form 5329 is now correct.  This is one of many examples of TurboTax developers' sometimes misguided attempts to simplify IRS wording and the meaning getting lost.

[tabula101]

@dmertz And it's finally filed! Thanks again for all your help answering my questions these past few days, really appreciate it!