Properly Reporting Removed Roth Excess Contribution

[Ken180]

In 2022, I made Roth IRA contributions for my wife and myself for 2022 ($7,000/each).  Later in the year, we received some inheritance that we found put us over the limit to make contributions for 2022.  We discovered this in early March 2023 while doing our taxes online.  I instructed our brokerage firm, Vanguard, to remove the excess contributions.  As the funds were in a mutual fund, they ended up selling at a loss, and this was reflected in the amount that was removed.  I also instructed Vanguard not to withhold any taxes on the removal/transfer to our settlement account.  All was handled as I expected, but Vanguard has not sent me any 1099 form to date.

I have been working on my taxes with Live Assistance on properly reporting this, but seems to be getting different advice, and at one point saw that I was being charged the 6% penalty in my tax calculation.

• Can anybody advise how I should answer the series of questions pertaining to Roth contributions, especially the questions that asks "Enter Excess Contributions"?  I initially entered the full $7,000 for each of us, but when I changed it to zero, the penalty went away.  Which is correct?
• Will I need to complete a Form 5329, or will TT take care of this?
• Will I need to amend my 2022 returns if I receive a 1099 from Vanguard next year?  I am assuming that since the contribution lost value that I do not owe anything.

Any guidance would be greatly appreciated as this is not a normal tax situation for me.

Thanks,

--Ken

[DanaB27]

Yes, you won't have to pay the 6% penalty because you removed the full excess contribution for 2022 by the due date of the 2022 tax return. You won't need Form 5329 part IV for the penalty.

If you removed the full $7,000 excess Roth contribution then you don't have to enter the contribution in the IRA contribution interview. Another option is to enter the $7,000 Roth contribution and then enter that you removed the excess contribution amount ($7,000 disregard the loss here) by the due date on the penalty screen at the end of the IRA contribution interview.

Yes, only earnings would be taxable in 2022 but won't be subject to the 10% early withdrawal penalty if removed after December 29th, 2022 (Form 5329 part I is used for the exemption). But you had a loss so you won't have a taxable event. Therefore, you won't need Form 5329 part I. All that TurboTax will do is add an explanation statement where you can enter that you withdrew the $7,000 excess contribution with a $$$$ loss.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 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 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 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 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution minus loss)
7. Box 2a enter $0
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 2023 Form 1099-R.

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

[Ken180]

Thank you very much for your detailed answer, Dana!  I will try to revisit this tonight or tomorrow given your instructions.  I greatly appreciate all of the guidance.  This was a one-off year, and I did not even know there was an income limit for Roth contributions until TT flagged it.

I thought I had both entered the $7k and then removed it as you suggested ("Another option is to enter the $7,000 Roth contribution and then enter that you removed the excess contribution amount ($7,000 disregard the loss here) by the due date on the penalty screen at the end of the IRA contribution interview."), but I believe that had generated the 6% penalty.  I'll need to check again to be sure, but that is what I recollect.

Also, I would rather not have to amend my 2022 return in 2023, so I may follow your well defined instructions.  I am not expecting any withholding since I instructed Vanguard not to do that.  I assumed that with a loss nothing would generate anything that would need to be withheld.

Thank you again,

--Ken

[Ken180]

Hi Dana,

After re-reading the interview questions and following your instructions, the penalty is gone and my answers seem to read correct.

Regarding the 1099-R form, I had wanted to avoid amending my return, but the interview questions kept asking for explanations and details that I was not clear about, so I think that it may be easier to just file an amended return when Vanguard sends me the actual 1099-R form unless I am mistaken.

--Ken

[DanaB27]

TurboTax will always add an explanation statement when you enter Form 1099-R with codes J and P. You will enter as the explanation that you removed the $7,000 excess contribution for 2022 with a loss of $$$$. 

If you have further questions you can tag me @DanaB27 and I will be happy to assist.

@Ken180