Excess Contributions on Roth IRA

[captainstress]

What did you end up doing? Did you create the "fake" 1099-R and e-file through TurboTax with it?

[DanaB27]

You will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of an 2023 excess contributions and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 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 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 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 2023?"
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 2024 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 "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

@captainstress 

[captainstress]

Thank you, DanaB27.  That is what I've done and it looks good to me.  I just worry that the 1099-R I "made up" to make TurboTax do its thing will confuse the IRS since I basically guessed the address that will be on the actual 1099-R that I'll receive later.  I suppose it doesn't matter if this 1099-R entry is just used to get the values in the right place on the e-filed 1040.

[Juir]

Re:  How to Handle Excess Contributions to a Roth IRA because of no earned income in that year.

I got varying answers from the Turbo Tax community, so I called the IRS and luckily got someone who knew what they were talking about.  I did not want to make up a 1099-R because I knew I would get one in the following year.  It has been over a year since this happened, so I'll try to remember.

First, we contacted the investment company where the excess contributions were made.  They sent us a letter stating how much was being returned to us and what the earnings were.  This excess contribution happened in 2021, but we didn't realize the mistake until Feb of 2022 -- which was before the tax filing deadline.   You have to pay the taxes on the earnings you made in the year that you had the earnings.  So, on our return I had to put the amount of this contribution that was returned on line 4a of 1040 and the earnings of excess contribution on line 4b.  (I can't remember if Turbo Tax allowed me to just add it in myself or if I had to pretend like I had a 1099-R for it.)  There is a way that you can add statements to your return explaining what is happening.  I did this.  I also typed up a letter explaining everything and also made a chart of what line 4a and 4b included because I had other amounts to put on line 4a and 4b.  I then included a copy of the letter that the investment company sent us detailing the amount that was returned -- investment and the earnings on the investment.  

Then I did not e-file this return.  If I made up a fake 1099-R to get numbers to go in lines 4a and 4b, I did not  want to send it to the IRS.  So, I removed the fake 1099-R and mailed the return along with my letter and the letter from the investment company.  I explained that I was paying taxes on the earnings now with my 2021 1040 return before the deadline of April 2022 so that there would be no penalties.  I also explained that I would not get a 1099-R on this transaction until Jan 2023.

Then in Jan 2022 we received the 1099-R for the transaction.  Again I made an explanation statement in our 2022 1040 return which you can do in Turbo Tax.  In the statement, I used my husband's name because it was his Roth IRA.  Here I will write H for husband.    This is what I wrote " H made an excess contribution to his Roth IRA of $2400 in 2021.  We had no earned income in 2021, so in February 2022 he realized this mistake and withdrew the excess contribution along with the earnings on this contribution before the return was due.  the earnings on the excess contribution were reported on our 2021 tax return on 1040 line 4b, and we paid taxes on the earnings of this excess with our 2021 return.  We received a 1099-R for 2022 in 2023 for removal of the excess contribution of $2400 and earnings of $123.71 for a total of $2523.71.  It does not appear on line 4a and 4b of our 2022 return because we already put it in our 2021 return before the tax deadline.  We did not have the 1099-R yet at that time, but we had a letter from the investment company with the correct amounts which we included in our 2021 return.  H is over the age of 59 1/2 so there are no penalties.  The issue of the excess contribution in 2021 and resulting earnings was taken care of (taxes paid) in Feb 2022 before the tax filing deadline for 2021 and addressed on the 2021 return."

Notice that we had to take care of this problem on 2 tax returns.  On the first return we put the amounts on line 4a and 4b, paid the taxes, included 2 letters, and mailed the return.  The next year, we included the 1099-R and any appropriate letters/numbers as the code of explanation, and also made the statement above in verbal explanation.  I e-filed for the 2022 return.  Remember that you have to pay the taxes for the year of the excess contribution.  You can't wait until you get the 1099-R.  I wasn't comfortable making up a 1099-R and sending it to the IRS because I think 1099's are reported to the IRS and they wouldn't have received one from our investment company and our made up one wouldn't have matched anything.  (Again, I called the IRS and the man we spoke to told us what to do.  You can also call the IRS to make sure you are doing the right thing.  If you do not like the explanation of the person you talk to, you can call again and you will get a different person to talk to who may really know.  This happened to us.)  So far we haven't heard from the IRS so hopefully all is well.  If they ever do contact us about this, I paid the taxes in the year they were due.

[Juir]

In my previous explanation, I think at the beginning of paragraph 4 I meant to write Jan 2023.  It's confusing.

[captainstress]

Thank you for the follow-up and tips.  It is a good reminder that the tax on the earnings is due when filing the year of the excess contribution, not the year you extract them from the Roth.