Reporting excess Roth IRA Contribution

[macuser_22]

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@fluxquantum94 wrote:

Based on what I understand from my exchange earlier in the thread - Because you had excess contributions in tax year 2021, even if you removed it before the tax filing deadline in 2022, you are still subject to the penalty of 6% for tax year 2021 because that 2021 money was not taken out on or before 12-31-2021. I had a similar frustrating situation where in tax year 2020 I had an excess contribution and didn’t know it carried over in 2021, so I’m paying for two years of penalties and finally now removing it this year so that I’m not penalized a third time for the 2022 tax year.

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No.  You have until until April 15 2022 to remove the 2021 excess or Oct 15 2022 if an extension is filed before Apr 15.

If the 6% penalty is there then the excess was not removed from the IRA contribution interview.

A *2020* excess had to be removed by May 17 (extended date because of COVID) or Oct 15 2021 if an extension was filed.

[mam62tt]

Thanks for the clarification.  My understanding as well is that you will not be subject to the 6% penalty if you remove the excess Roth IRA contribution prior to the tax filing date.  I have done that.  Regarding the removal of the excess contribution in the IRA interview, are you saying to not enter anything regarding the Roth IRA contribution and just fill out the substitute 1099-R only?  Should I answer NO to the question “Did you make a Roth IRA contribution for 2021? “.

Reading through all this it seems it might be better to not enter anything regarding the excess Roth IRA contribution in my 2021 tax filing and just wait until I file my 2022 taxes and use the 1099-R my financial institution will send me.  I had a loss so there are no taxable earnings to report.  Is this an option?  What is the advantage to reporting using a substitute 1099-R for my 2021 tax filing now?

Thanks for you assistance.

[Anne_2022]

I also have a similar situation and hope someone can help me clarify.

I contributed to 2021 Roth IRA but found out in March 2022 that I did not qualify to contribute when I started doing my taxes. I immediately contacted my brokerage and they made a distribution of $6000 (original contribution) + $50 (earnings).  

From reading the thread it seems like I should use codes 8 and J, can someone confirm if that is right?

It was a Roth so it was after tax already but code 8 is for "contribution taxable in 2021."

Turbo Tax also gives the option of "I need to prepare a substitute 1099-R." Since I won't receive my 1099-R till 2023, should I use that or should I use the Form 1099-R option?

Is the following correct for the boxes:

Box1 gross distribution-6000? 6050?

box2a-taxable amount -6050? 50?

box2b-taxable about not determined? total distribution?

box3-capital gain(included in 2a)-50?

Thank you!

[macuser_22]

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@mam62tt wrote:

Thanks for the clarification.  My understanding as well is that you will not be subject to the 6% penalty if you remove the excess Roth IRA contribution prior to the tax filing date.  I have done that.  Regarding the removal of the excess contribution in the IRA interview, are you saying to not enter anything regarding the Roth IRA contribution and just fill out the substitute 1099-R only?  Should I answer NO to the question “Did you make a Roth IRA contribution for 2021? “.

Reading through all this it seems it might be better to not enter anything regarding the excess Roth IRA contribution in my 2021 tax filing and just wait until I file my 2022 taxes and use the 1099-R my financial institution will send me.  I had a loss so there are no taxable earnings to report.  Is this an option?  What is the advantage to reporting using a substitute 1099-R for my 2021 tax filing now?

Thanks for you assistance.

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If you removed it then that is the same as never making any contribution.

If you had a loss the box 2a should be zero.

You do NOT use a substitute 1099-R, just a 1099-R.

[macuser_22]

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@Anne_2022 wrote:

I also have a similar situation and hope someone can help me clarify.

I contributed to 2021 Roth IRA but found out in March 2022 that I did not qualify to contribute when I started doing my taxes. I immediately contacted my brokerage and they made a distribution of $6000 (original contribution) + $50 (earnings).  

From reading the thread it seems like I should use codes 8 and J, can someone confirm if that is right?

It was a Roth so it was after tax already but code 8 is for "contribution taxable in 2021."

Turbo Tax also gives the option of "I need to prepare a substitute 1099-R." Since I won't receive my 1099-R till 2023, should I use that or should I use the Form 1099-R option?

Is the following correct for the boxes:

Box1 gross distribution-6000? 6050?

box2a-taxable amount -6050? 50?

box2b-taxable about not determined? total distribution?

box3-capital gain(included in 2a)-50?

Thank you!

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No.  Code PJ and say it is a 2022 1099-R.   Code 8 means it was a contribution *for* 2022 not 2021.

Box 1 $6,000 box 2a $50.

[Anne_2022]

Thank you for your reply.

Do I need to fill out boxes 2b or 3?

[macuser_22]

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@Anne_2022 wrote:

Thank you for your reply.

Do I need to fill out boxes 2b or 3?

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No.

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2021 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 14 State withholding. Then you must also enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld.

The 2022 code JP will not do anything in 2022 but the withholding will be applied to 2022.

You would enter the 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 2022 1099-R. - That makes it taxable in 2021 and not 2022

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 2022 1099-R on your 2021 tax return to avoid having to amend in 2022.

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.

[fluxquantum94]

@mam62tt I elected to report my excess contribution withdrawal that I did this year for  for tax year 2021. Reporting it this year will make it so that you don’t have to amend next year. I didn’t want to wait until 2023 to get my 1099-R for 2022 from my brokerage firm so I just filled out another 1099-R myself through turbo tax. Depending on your situation you may have to pay taxes on the distribution and taxes on the earnings. I also had a loss reported so that makes things a little simpler. In terms reporting what you contributed, I think you can say whatever amount after you removed the excess. I had contributed a little too much in 2021 as well.

[ruddyduck88]

1) I am confused. I have installed the Home and Business 2021-2022 on laptop. It says, contrary to your answer:

Code 8 is "return of contribution taxable in 2021" and

Code P is "return of contribution taxable in 2020"

Please clarify. Should I use Code 8? I have not file my 2021 return.

2) I have capital gain, should I report capital gain in Boxes 2a and 3?

[macuser_22]

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@ruddyduck88 wrote:

1) I am confused. I have installed the Home and Business 2021-2022 on laptop. It says, contrary to your answer:

Code 8 is "return of contribution taxable in 2021" and

Code P is "return of contribution taxable in 2020"

Please clarify. Should I use Code 8? I have not file my 2021 return.

2) I have capital gain, should I report capital gain in Boxes 2a and 3?

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If a 2021 contribution then the 2022 1099-R will have a code "P" which means taxable in 2021.   Code P advances by 1 each year.    That is why TurboTax will ask if it is a 2021 or 2022 1099-R - say 2022, then it is taxable in 2021.

Code 8 is a return of the 2021 contribution  returned  *in* 2021 and a 2021 1099-R was received.

[bigslimdog]

Hello again,

I elected to have 10% withheld at the federal level by my Roth IRA custodian on the removal of excess form. I understand I will need to enter this withholding amount when I fill out the 1099-R on my 2022 tax return, but should I also fill in this same withholding amount on my mock 1099-R on my 2021 return now? I tried adding the withholding amount to the mock 1099-R as a test, and it did not seem to affect my 2021 tax due in any way.

My second related question is, must I pay the 10% early withdrawal penalty now with my 2021 return? It seems that TT is in fact adding the penalty to the amount I owe. I thought that by having the tax withheld by my custodian, I could avoid having to pay it myself with my 2021 return, but perhaps this is not true. I'm wondering now if I should have elected to do no withholding. If you can clarify, I would appreciate it.

Thank you.

[macuser_22]

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@bigslimdog wrote:

Hello again,

I elected to have 10% withheld at the federal level by my Roth IRA custodian on the removal of excess form. I understand I will need to enter this withholding amount when I fill out the 1099-R on my 2022 tax return, but should I also fill in this same withholding amount on my mock 1099-R on my 2021 return now? I tried adding the withholding amount to the mock 1099-R as a test, and it did not seem to affect my 2021 tax due in any way.

My second related question is, must I pay the 10% early withdrawal penalty now with my 2021 return? It seems that TT is in fact adding the penalty to the amount I owe. I thought that by having the tax withheld by my custodian, I could avoid having to pay it myself with my 2021 return, but perhaps this is not true. I'm wondering now if I should have elected to do no withholding. If you can clarify, I would appreciate it.

Thank you.

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#1)   It makes no difference.  TurboTax will ignore any box 4 withholding on a 2022 code P entered in 2021.

#2 Withholding has nothing to do with the early distribution penalty.

[bigslimdog]

Thanks, @macuser_22.

The next difficulty I am facing is that TT seems to be including the entire amount of the Roth IRA corrective distribution (contributions + earnings) as taxable income on my 2021 New Jersey return. This doesn't seem correct, as the contributions are also taxed as income on the same return (i.e. they're getting double-taxed). How should I fix this?

Per earlier instructions in this thread, I entered the state distribution amount (Box 16) of the 1099-R as the total (contributions + earnings)--the same as Box 1.

[bigslimdog]

I am replying to my previous post because I have learned more by studying how TurboTax filled out the New Jersey Git2 Worksheet C (IRA Withdrawals). In TT, the form is named "Pensions Wks". I see what it's doing, but I am still unclear how to proceed.

Line 1a is Value of all IRA's on 12/31/2021. I got this value from my custodian.

Line 1b is Contributions made for the tax year from 1/1/2022 - 4/15/2022. This is blank as I made none.

Line 1c is Value of all IRA's on 12/31/2021 and contributions made for the tax year from 1/1/2022-4/15/2022 (add lines 1a and 1b). For me 1a = 1c.

Line 2a is Total distributions from IRA during the tax year (do not include tax-free rollovers). This shows the amount of my corrective distribution. But critically this distribution was made 4/18/2022.

Line 3 is Total value of IRA(s) (add lines 1c, 2a, and 2b). For me, this is simply 1c+2a. But the distribution from line 2a is already included in the value of the IRA on 12/31/2021 (Line 1a). So the IRA value is artificially inflated by this summing. If the distribution were made in 2021, it would not be include in the 1a value, which seems to be the intent of the worksheet.

My intuition tells me that the correction distribution, which TT carried over from my federal return, was not actually "during the tax year". Yes, it is a 2021 corrective distribution at the federal level, but everything I have seen in the New Jersey tax literature leads me to believe that it is a (non-qualified) 2022 distribution in the New Jersey tax world. In this case, I believe I ought to be reporting no 2021 New Jersey IRA withdrawals, and should instead report it as a 2022 withdrawal next year.

My questions are, (1) is this all correct and (2) how can I fix this on my 2021 state return in TT?

Thank you for any insights.

[macuser_22]

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@bigslimdog wrote:

I am replying to my previous post because I have learned more by studying how TurboTax filled out the New Jersey Git2 Worksheet C (IRA Withdrawals). In TT, the form is named "Pensions Wks". I see what it's doing, but I am still unclear how to proceed.

Line 1a is Value of all IRA's on 12/31/2021. I got this value from my custodian.

Line 1b is Contributions made for the tax year from 1/1/2022 - 4/15/2022. This is blank as I made none.

Line 1c is Value of all IRA's on 12/31/2021 and contributions made for the tax year from 1/1/2022-4/15/2022 (add lines 1a and 1b). For me 1a = 1c.

Line 2a is Total distributions from IRA during the tax year (do not include tax-free rollovers). This shows the amount of my corrective distribution. But critically this distribution was made 4/18/2022.

Line 3 is Total value of IRA(s) (add lines 1c, 1a, and 2b). For me, this is simply 1a+2a. But the distribution from line 2a is already included in the value of the IRA on 12/31/2021 (Line 1a). So the IRA value is artificially inflated by this summing. If the distribution were made in 2021, it would not be include in the 1a value, which seems to be the intent of the worksheet.

My intuition tells me that the correction distribution, which TT carried over from my federal return, was not actually "during the tax year". Yes, it is a 2021 corrective distribution at the federal level, but everything I have seen in the New Jersey tax literature leads me to believe that it is a (non-qualified) 2022 distribution in the New Jersey tax world. In this case, I believe I ought to be reporting no 2021 New Jersey IRA withdrawals, and should instead report it as a 2022 withdrawal next year.

My questions are, (1) is this all correct and (2) how can I fix this on my 2021 state return in TT?

Thank you for any insights.

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Sorry but I know nothing about the NJ software or NJ tax laws.