Question about Excess Roth IRA Contribution Removal and Tax Consequences

[EagerBeaver998]

Hello,

I have a quick question on how to treat the earnings accrued on removal done in January 2022 of excess Roth IRA contributions that were initially made in 2021. I read a few similar questions and responses but still want to clarify on which year(s) specifically to report the earnings associated with the removal of excess contributions.

Here is the background:

I made an excess $6,000 contribution in 2021 to my Roth IRA which I was not eligible to do due to income coming in higher than expected. From investments in the Roth IRA I accrued $500 of earnings on the $6,000. I emailed to remove all $6,000 excess contributions and the $500 earnings in December 2021 but it was not completed until January 2022 (all of the excess contribution and earnings were sent to my bank account and there were no taxes withheld). I did not get the 2022 1099-R form until 2023 this past week. My 2021 1099-R form did not reflect the removal (I double-checked to be sure).

1) I understand I will have to pay the 10% early withdrawal penalty on the $500 earnings and that it will count as taxable income for the year I made the contribution which is in 2021. Am I subject to any other 6% IRS penalty or other fees?

2) Do I have to amend my 2021 tax form to include taxable income by the $500 earnings as well as the 10% early withdrawal penalty?

3) Do I need to include the removal of excess contributions for my 2022 tax year given that I received the actual earnings and initial excess contribution into my bank account in January of 2022? Or does it just get accounted for in 2021 on the basis that I had initially contributed the excess amount in 2021?

4) If I don't report the earnings as part of taxable income for 2022 tax year, do I still need to include the 1099-R for my 2022 tax year filing or do anything else for my 2022 taxes which I am now filing this year? 

Thank you.

[dmertz]

1)  The only penalty is the 10%, $50 on the taxable $500 reportable on your 2021 tax return.

2)  If not already reported, you must amend the 2021 tax return to add the $500 code JP  2022 Form 1099-R.  Your Form 1040-X will show the additional $500 of taxable income and your Form 5329 will show only Part I completed, calculating the $50 penalty on the $500 early distribution.  When entering the 2022 Form 1099-R into 2021 TurboTax, be sure in the follow-up questions to indicate that it's a 2022 Form 1099-R so that 2021 TurboTax treats the amount in box 2a as taxable in 2021.

3)  In the explanation with your Form 1040-X you should indicate that this is for a return of your $6,000 excess Roth IRA contribution, resulting in a distribution of $6,500 with the adjustment for attributable net income.  The $6,000 itself is not taxable.  The code JP 2022 Form 1099-R should show only $500 in box 2a.

4)  Nothing about this is reportable on your 2022 tax return unless you mistakenly had taxes withheld from this distribution, in which case this Form 1099-R needs to be entered into both 2021 TurboTax and 2022 TurboTax.  The credit for tax withholding goes on your 2022 tax return, not on your 2021 tax return.

[DanaB27]

1) Yes, you will have to pay the 10% early withdrawal penalty on the $500 earnings in 2021 and the $500 will be taxable income in 2021. No, you don't have to pay the 6% excess contribution penalty because you withdrew the excess before the 2021 due date. If you show the 6% penalty on your 2021 tax return then you can remove it by entering on the penalty screen that you withdrew the $6,000 contribution by the due date during the IRA contribution interview.

2) Yes if you didn't create a Form 1099-R to report the withdrawal of excess contributions plus earnings on your 2021 tax return then you will have to amend your 2021 tax return to include the Form 1099-R that you received. TurboTax will automatically calculate the 10% penalty on the $500. Please see How to amend a tax return for instructions.

3)and 4) No, you don't need to report it in 2022 and therefore don't need to enter Form 1099-R for the withdrawal of excess contributions and earnings on your 2022 tax return. The only exception would be if you had taxes withheld (box 4 and/or box 14). Then you must enter the 2022 Form 1099-R into the 2022 tax return since the withholdings are 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.

[EagerBeaver998]

Thanks this is very helpful and answers my questions.

I have amended my 2021 on Turbotax and clicked to e-file.

However when I set a payment date I am having issues. Turbotax automatically sets payment date to today which is a weekend and apparently needs to be a regular banking day. I am unable to change the payment date to be the upcoming Monday as the box is greyed out and Turbotax automatically sets payment date to today.

Is there any way to still e-file and pay for the amended 2021 taxes online?