How to fix prior year excess ROTH IRA contribution?

[jxinleblanc]

I am under 59 1/2.  In 2020, I made $6k excess ROTH IRA contribution due to income over the limit.   Back then I didn't enter the contribution into TurboTax, and didn't know the problem.   The account balance at the end of 2020 is $6208.  For 2021, I made another $6k excess ROTH  contribution.  I am working on my 2021 taxes now.  The account balance is now $12,311.  What should I do to fix both years' excess contributions?  My plan is:

Step #1:  Withdraw both years' excess contributions plus earnings ($12,311) from account.   
Step #2:  Amend 2020 return to report the excess contribution, and let TurboTax calculate the 6% excess contribution penalty ($360), and pay.  Alternatively, I can print and file 2020 Form 5329 by itself, and pay the 6% penalty without amending.

Step #3:  In 2021 return, report excess contribution, also answer yes to prior year excess contribution.  But mention I had withdrew excess contribution before tax due date.  So for 2021, no more penalty.

Step #4:  Also in 2021 return, create a 1099-R form with code "JP" in box 7.  This 1099-R should have ($12,311) in box 1 "gross distribution",  and $311 in box 2a "Taxable amount".  

Step #5:  When I receive a 2022 1099-R form in early 2023 with code JP in box 7 about the excess distribution withdrawal, I can ignore the form because I already entered it in Step#4.
Did I miss anything?  Thank you.

[DanaB27]

Yes, for the 2021 excess contribution you will have to withdraw the excess contribution plus earnings by the due date to avoid the 6% penalty. You will get a 2022 Form 1099-R with code JP, this belongs on your 2021 return.

For the 2020 excess contribution, you will only withdraw the excess contribution without the earnings since it is after the due date of the 2020 tax return.  You will get a 2022 Form 1099-R with code J and this belongs on your 2022 return. You will have to pay the 6% penalty for 2020 and 2021 since the 2020 excess wasn't withdrawn by December 31, 2021. 

On your 2021 return follow these steps:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter your $6,000 contribution for 2021
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 ($6,000)
7. Continue until the penalty screen and enter $6,000 as withdrawn by the due date

Yes, can create Form 1099-R with code JP to avoid amending the return when you get the form in 2023. 

Yes, you can ignore the 2022 Form 1099-R with code JP 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 Form 1099-R:

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) of the 2021 excess contribution
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.

You will have to amend your 2020 tax return since your tax is changing.

On your 2020 return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter your $6,000 contribution for 2020
5. TurboTax create Form 5329 and calculate the 6% penalty