not enough in roth ira account to reverse an excess contribution

[utexex79]

i made an excess contribution to a Roth iRA in 2019, so i need to withdraw that contribution to reverse it. in the meantime, due to the downturn in the market, the value of that account is now less than the contribution i made. do i just withdraw everything from the account to reverse the contribution?

[DanaB27 · Accepted solution]

Yes, you will tell your financial institution that you want a return of the excess contribution. 

You will get a 1099-R  in 2021 with codes P and J. This 1099-R will have to be included on your 2019 tax return and you have two options: 

• You can wait until  you receive the 1099-R in 2021 and amend your 2019 return or
• You can report it now in your 2019 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/of box 12 State withholding. Then you must enter the 2020 1099-R into the 2020 tax return since the withholding is reported in the year that the tax was withheld. The 2020 code P will not do anything in 2020 tax return but the withholding will be applied to 2020.

To create a 1099-R in your 2019 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. Select "I'll type it in myself"
5. Select "I need to prepare a substitute 1099-R"
6. Box 1 enter total distribution (contribution minus loss)
7. Box 2 leave blank
8. Box 7 enter P and J 
9. On the "Which year on Form 1099-R" screen say that this is a 2020 1099-R.
10. Continue until you get to the explanation screen and answer that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2019.

[utexex79]

thanks for the reply.  one question, you say I should select codes P and J in box 7.  however code P indicates "Return of contribution taxable in 2018", shouldn't this actually be code 8, "return of contribution taxable in 2019'?

[utexex79]

never mind, i think this is a bug in turbo tax.   the IRS instructions indicate that the code P description should actually be "Excess contributions plus earnings/excess deferrals taxable in 2019".

[macuser_22]

There is no  bug.  Re-read the instructions posted by DanaB27.   "9. On the "Which year on Form 1099-R" screen say that this is a 2020 1099-R."

The year of a code P advances every year.  For a 2019 1099-R it is "2018", for a *2020* 1099-R that you are entering when you choose that it is a 2020 1099-R then taxable in 2018 advances to 2019.