Need help Filling and figuring out excess roth recharacterization Form 1099-R

[yassir_nawaz]

I will be as detailed as possible as I am in a fix how to figure out and file my taxes. 

Before filing my Taxes in 2021 I made a 6000$ contribution to a traditional IRA and wanted to use a back door Roth conversion.  The Merill Edge agent however asked me to fill a recharacterization form and not knowing what it is I filled that. and 6000$ were recharacterized to a Roth IRA. now my income does not let me contribute to Roth at all. Later in the year I did the same thing and in december 2021 put 6000$ in a traditional IRA and than recharacterized it to the Roth account. I have received two 2021 forms 1099-R one with an R code ( old year contribution) and the other with an N code. 

In April 2022 filling my taxes I realized how big of a mistake is made. I have withdrawn all the money from the roth IRA and closed it on April 6th. 

Reading online forms. 

I have amended my 2020 Tax return and have included the recharacterization to Roth and have amended it and will be mailing it in to the IRS with 6% penalty for the excess contribution to Roth on the amount recharacterized from 2020 contribution.  ( please advise if this is the right step)

Please advise regarding 2021 Taxes. 

do I pay again 6% penatly on the 2020 recharacterization since the money was not withdrawn before Dec 31st. 

I understand that I dont have to pay any penalty on the 2021 contribution as it was withdrawn before the Tax filling deadline deadline. 

In turbo tax when I select I withdrew 12000 dollars from the Roth IRA ( the total 2020 and 2021 contributions) it give me error in smart check and  following are the two errors I am getting. Also can not  e-file with these errors just keep going in a loop. 

Will really appreciate the help to get this right. 

[DanaB27 · Accepted solution]

Yes, you amended your 2020 tax return correctly to report the recharacterization and to pay the 6% penalty.

Yes you will also pay the  6% penalty for the 2020 contribution on your 2021 tax return. 

Yes, you do not pay the 6% penalty for the 2021 contribution since you withdrew the excess plus earnings before the due date.

You only will enter the 2021 contribution amount $6,000 as withdrawn on the penalty screen. Then TurboTax will only calculate the 6% penalty on the 2020 excess.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 (if it wasn't carried over).
6. On the penalty screen enter the 2021 contribution amount as withdrawn by the due date ($6,000).

Next year when you get Form 1099-R with code J for the 2020 excess contribution distribution you will enter it into TurboTax, this will be entered on Form 5329, and will show that the 2020 excess has been removed.

Also, you will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of 2021 excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 2022 Form 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 Form 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholdings will be applied to 2022.

To create a Form 1099-R in your 2021 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 2021?"
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 2022 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 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

[yassir_nawaz]

Thank you for such a detailed reply and help me understand all of this situation. 

I have two follow up questions. 

you mentioned in 2020 excess contributions write 6000$ ( unless its carried over) what does carried over means?  I have high income so I do not qualify for any Roth contributions in 2020 and 2021.  So 6000$ should be written correct?

Second question is what does Excess roth IRA credit means when it asks to apply anything towards credit?

Also I will likely ammend the 2021 Tax return next year as at this time I have no clue about the total amount withdrawn from the Roth IRA as it was withdrawn in the form of stocks and deposited to my regular brokage account.  So I dont know the exact amount of contributions and earnings that are withdrawns for 2020 and 2021. Also I have not withheld taxes on the contributions and these are early withdrawls from the roth as I am only 39 and the roth was not 5 years old. I plan to pay them at the time of filling my 2022 taxes. Will that change anything in the detailed answer you have provided above?

Thank you so much for the detailed answer above. I look forward to your reply. 

[DanaB27]

Yes, you select to wait for the 2022 Form 1099-R with codes P and J and amend your 2021 return. You can use the instructions to help you enter the Form 1099-R on your 2021 amended tax return.

If you make an excess contribution and don’t withdraw it by the due date, then you will have to pay each year the 6% until the excess is removed or absorbed by an allowed contribution. You will have an excess carried over to 2021 and you will need to enter $6,000 on the "Enter Excess Contributions" screen on your 2021 tax return since you didn’t remove the 2020 excess by the 2020 tax return due date.

Excess Roth IRA credit means if you are allowed to make a Roth contribution in 2021 then you can apply the excess contribution from a prior year as a 2021 contribution. If you are allowed to do that then you will get a "How Much Excess to 2021?" screen right after the "Enter Excess Contributions" screen.

Please make sure that you have entered the recharacterization with the steps below:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the traditional IRA contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

[yassir_nawaz]

Thank you very much that answers all my questions. 

much Appreciated 

[yassir_nawaz]

Now fast forward to 2022 and I am trying to do my taxes again. I removed all the money from the Roth IRA as detailed above and have paid no taxes at the time of the withdrawl. I have contributed 6000$ to the roth IRA in 2020 and 6000$ in 2021. I was not qualified to contribute to Roth. I withdrew 12417$ in 2022 before the tax filling deadline. I paid the excess penalty in 2021 for 6000$ and an ammended my tax return in 2020 for the excess contribution. I have removed the 2021 excess money contributed before the tax filling deadlines. do i still pay penalty for the 2020 money in 2022 the eccess 6000$. Also how should I report in the turbo tax of this question. kindly help. 

[DanaB27]

No, you don't have to pay the 6% penalty on your 2022 tax return because you removed the excess in 2022. You should have the 2020 excess on line 18 of Form 5329 and then when you enter your Form 1099-R with code J for the regular distribution then this will show up on line 20 of Form 5329 and therefore erase the excess contribution.

You will include the 2020 excess contribution for the net contributions prior to 2022 (but do not include the excess contribution for 2021 that was removed by the due date of the 2021 return).

@yassir_nawaz 

[yassir_nawaz]

so the contibutions prior to 2022 will be 6000$ the contribution I made in 2020.  that is what i mention in that line in turbo tax.?

I have recived only one 2022-1099 R this year. I am attaching a copy with this. There is a code J but no code P. 

Please advise me how to amend the 2021 tax return with this. Also do I pay the 10% withdrawl penalty with the 2021 amended tax return or the 2022 return. 

[DanaB27]

It seems you requested a regular distribution for the 2020 and 2021 excess and therefore received Form 1099-R with code J. This belongs on your 2022 return.

You might want to check with your institution if they can issue you corrected Forms 1099-R one for the 2021 excess plus earnings with codes P and J and one for the 2020 excess with code J.

If they don't correct the Form 1099-R you would enter $12,000 for net contributions prior to 2022 (assuming you didn't make any other Roth contributions prior to 2020).

@yassir_nawaz 

[yassir_nawaz]

If they do not correct the form and I use this form on my 2022 tax return. Do I have to amend my 2021 taxes? 

also when I add 12000$ as contributions prior to 2022. It only asks for 45$ of taxes would that be accurate? I thought I was supposed to pay 10$ penalty on the distributions? 

please advise. 

YN 

[yassir_nawaz]

looking forward to your reply to this message. 

thank you, 

Yassir

[DanaB27]

Yes, only $417.70 would be taxable income and subject to the 10% penalty if you are under 59 1/2 (assuming didn't make any other Roth contributions prior to 2020).

You can check Form 5329 part I for the 10% penalty calculation. The penalty should be $41.77 and then the $417.70 will also be included in your taxable income and taxed according to your tax bracket.

@yassir_nawaz 

[yassir_nawaz]

Thank you very much.

One last question if I use this 1099-R and the institution does not change it. Do I need to amend the 2021 tax return? 

YN 

[DanaB27]

No, you don't need to amend your 2021 tax return if the institution doesn't change the issued Form 1099-R.

@yassir_nawaz