How do I file that 2020 Roth Excess Contrib was distributed 1/2021 but then excess & earnings returned when found that it was not in excess? Can written explanation be done in TT?

[ThomasM125]

You have up until the due date of your tax return to make an IRA contribution, so you should just report the net total that you contributed for 2020 to your ROTH IRA when you file your tax return.

[ADVDan]

I was told by an IRS phone agent the the distribution will show up as an early distribution (my wife is <59.5) for 2021’s taxes and that we will be assessed the 10% penalty. She said that I needed to attach a statement as to what occurred. Is all that incorrect?

[macuser_22 · Accepted solution]

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@ADVDan wrote:

I was told by an IRS phone agent the the distribution will show up as an early distribution (my wife is <59.5) for 2021’s taxes and that we will be assessed the 10% penalty. She said that I needed to attach a statement as to what occurred. Is all that incorrect?

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If you requested a "return of contribution" plus earnings  from the IRA custodian then, yes the IRS agent is incorrect or did not understand that is was returned plus earnings or you did not understand just what would be taxable.

The returned contribution is not taxable or subject to penalty but any earnings are both taxable and subject to an early distribution penalty if under age 59 1/2.

You will receive a 2021 1099-R for this in January of 2022 since it was distributed in 2021, however, the earnings are taxable in the year contributed - 2020, so when you receive the 2021 1099-R you will need to enter it in an amended 2020 tax return.

Whether the return was because of an excess or you just wanted it returned is irrelevant. 

[macuser_22 · Accepted solution]

In  addition, since it was removed prior to the due date, be sure to revisit the IRA contribution interview (if you entered it there) and remove it as id it was never contributed because it is  no longer an excess or a contribution.

Also to avoid having to amend when you receive the 2021 1099-R:

*IF* you requested a return and it was removed before the due date of the 2020 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld.

The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2021.

For 2020 You would enter a dummy 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

[hchan32]

@macuser_22 is correct.

Since you requested a removal of contributions plus earnings before the 2021 filing due date, your earnings will be subject to the 10% penalty if you are under age 59.5 and your contributions will be treated as never having been contributed.

You will receive a 2021 Form 1099-R next year, however you can report it now instead of waiting for your form next year by following the instructions that @macuser_22 has listed. This other discussion is also a good reference.

Even though you returned the amounts after you found out it was in fact not excess, your earnings will still be taxed since they were withdrawn early (aka your return did not perfectly reverse the removal)

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

[ADVDan]

Thank you sooo much for that very detailed answer. I should be able to get it from there. This is my 2nd yr using TT. I was not aware that there must be 1098 forms for me to make a dummy with and places for me to write accompanying notes; or, is this   having to be hard copy submitted now rather than electronically done? Yes, there was withholding and I do want to use your suggestion to avoid having to amend the 2020 return in 2021. 

[hchan32]

Yes, you can follow @macuser_22's instructions to input the information for your 2020 return and avoid having to amend it next year. However, because you have withholding, you will need to include the 1099-R information on your 2021 information as well (withholdings are applied to the year in which the excess removal is made, therefore your withholding will count towards your 2021 return).

Hope this makes sense.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

[macuser_22]

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@ADVDan wrote:

Thank you sooo much for that very detailed answer. I should be able to get it from there. This is my 2nd yr using TT. I was not aware that there must be 1098 forms for me to make a dummy with and places for me to write accompanying notes; or, is this   having to be hard copy submitted now rather than electronically done? Yes, there was withholding and I do want to use your suggestion to avoid having to amend the 2020 return in 2021. 

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I think you mean 5498, not 1098.    The 5498 just documents the deposit and is information only to you and does not go on a tax return.    That form is usually not issued until May.

As I also said above, when you enter the code PJ dummy 1099-R in 2020 it will ask for an explanation where you can enter your notes.

As I said above, if there was tax withheld in 2021 the  that withholding can only be applied to your 2021 tax return (the year that tax was withheld) and  not 2020 (the year of the taxable earnings) which makes having withholding on a return  of contributions that span tax years totally useless to pay the tax.

[ADVDan]

Thank you, everybody. You each were very helpful (and patient).

[ADVDan]

Thank you, ThomasM125! Your method of just reporting what the final total contribution was after returning the the distributed amount and earnings is the simplest and what I am going to do. When I get my 1099-R in 2022 for 2021's distribution that was returned to the Roth, I will follow macuser_22's instructions for inputting the 1099-R info into an amended 2020 return and explaining it. With the 1099-R in hand, I will have the information to complete the boxes on TurboTax's 1099-R for which I do not have  the info for at this time. Although, I would like to pay the taxes due on the earnings and the penalty in order to avoid any additional costs (like interest they might want to charge), I don't have the detail to ensure correct entries on a 1099-R's that I make up. I don't see how to get TurboTax to let me pay unless I make up a 1099-R myself with the 2020 tax filing. Do I have this right?

[camlc]

Hoping to get clarification statement:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld.

The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2021.

Does this mean that we shouldn't report it now, or just that we cannot ignore the 1099-R next year when we receive it? We know there will be tax withholding reported since we can see it was withheld via our transaction history for the excess contribution withdrawal.  

Thank you in advance.  This is the first time we've encountered an excess contribution situation and I want to make sure I understand.

[macuser_22]

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@camlc wrote:

Hoping to get clarification statement:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld.

The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2021.

Does this mean that we shouldn't report it now, or just that we cannot ignore the 1099-R next year when we receive it? We know there will be tax withholding reported since we can see it was withheld via our transaction history for the excess contribution withdrawal.  

Thank you in advance.  This is the first time we've encountered an excess contribution situation and I want to make sure I understand.

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If this was a 2020 excess returned in 2021 then the 1099-R code JP must be entered into an 2020 or amended 2020 tax return to report the box 2a amount.

If tax was withheld in box 4 then ti must also be entered into the 2021 tax return to apply the tax withholding.

That is why is does not make any sense to have tax withheld on a return of contribution that spans tax years.  The contribution's earnings are taxable in the tax year that the contribution was *for* but any tax withheld can only be applied to the year that the excess was *returned*. 

[camlc]

Thank you for the response, but that didn't really clarify anything for me.

I'm confused as to what the 2019 tax return would have to do with this situation.  Why would I need to amend the 2019 tax return if my contribution made in 2020 was for the 2020 tax year, so earnings would be reported in 2020? 

Here's what my understanding currently is:

- For 2020 Tax Year: Create the 1099-R and reflect the distribution and gain, entering code JP into Box 7, leaving the fed/state taxes withheld blank. Indicate the 1099-R is for the 2021 Tax Year when prompted.  File our taxes. 

- For 2021 Tax Year: We'll receive the 2021 1099-R for the 2020 excess contribution withdrawal returned in 2021. We'll enter the information as presented on the 1099-R, including the fed/state witholding. No need for amendment of 2020 Tax Return.

Is that the correct way to handle this.  OR, in this situation is it better to just wait and file an amendment.  The taxes have already been withheld, so whether or not having them withheld makes sense is a moot point.

Again, thank you.  I just want to be clear on what the most clean/efficient course of action is for this situation. 

[macuser_22]

Sorry, the years were incorrect - I corrected the answer above with the correct years.